Corporations

Holger Spamann (Harvard Law School)
Jens Frankenreiter (Washington University in St. Louis School of Law)

We wrote this book as the basis for a first course in corporate law. We provide extensive introductions and explanations to situate the cases and other materials.

We strongly encourage you to read the cases from two related but quite different perspectives. The first is the usual, legal perspective. Almost all the cases in this book are seminal cases familiar to all corporate law practitioners. They “lay down the law.” You can read them for what the law is, for what it could have been, and for how judges chose between the various paths open to them.

The second perspective is less obvious but ultimately even more important. The facts of the cases demonstrate how corporate actors use the building blocks of the corporate form to achieve various goals—they illustrate corporate law’s transactional nature. There are infinite permutations of the various building blocks, so we can’t show all. But we have endeavored to include a good selection of standard transactional scenarios—buy-and sell-side M&A, share reclassifications (Zuckerberg), executive compensation (Disney), dividends (Sinclair), jostling for control of the board (Blasius and others), control conflicts in private corporations (Coster; eBay), etc.—and moves (voting, written consent, unilateral board action, enlarging the board, issuing new stock, merger, asset sale, etc.). Most court opinions evaluate these maneuvers or some small part of them under equitable principles. But you should also pay attention to the maneuvers themselves. They are what most corporate lawyers do in practice and most maneuvers do not end up in court. This is a fundamental difference from other areas of law where lawyers mostly get involved at the back end, so to speak.

A separate reason to pay great attention to the facts is that much of corporate law consists of broad standards that take on real meaning only in their application. Understanding the law often requires reading the full facts. The judges clearly considered these factual details important, even on appeal, and so should you!

With one exception, all cases in these materials are Delaware or federal cases. Delaware law is the dominant corporate law of the United States. In the U.S., each state has its own corporate law, and the applicable law is the law of the state of incorporation. Corporations are free to incorporate where they want, in return for paying incorporation tax (“franchise tax”) in that jurisdiction. Delaware has attracted more than half of all public corporations and many private corporations in the U.S. (Delaware derives a third of its state revenue from the franchise tax!) Furthermore, Delaware is also the model followed by many other states. As a result, we see no point in teaching you other states’ law. We occasionally use other countries’ laws to expose you to alternative arrangements; the variance between countries is much larger than between U.S. states.

For similar reasons, we teach only corporations proper. We do not cover partnerships, limited liability companies (LLCs), or the many other entity forms now available. These other forms are undoubtedly important in practice. But an introductory course cannot teach the nuanced differences between these forms, many of which lie in tax law. We only give you a brief warning about accidental partnerships in the first class. However, there are substantial commonalities between the various entity forms. If you understand corporate law and the underlying business problems, you will easily learn the other forms when the need arises.

Glossary

Bylaws = a corporation’s secondary governing document (cf. DGCL 109(b)). The charter can provide, and usually does provide, that the board can amend the bylaws without shareholder consent (DGCL 109(a); contrast the charter itself, which can only be amended by board and shareholders jointly, DGCL 242(b)).

Certificate of Incorporation = a corporation’s founding and primary governing document (cf. DGCL 102).

Charter = certificate of incorporation.

Common stock / share: see share.

Debt holders = creditors.

DGCL = Delaware General Corporation Law, i.e., the basic Delaware statute. As a guide to this important statute, you might want to consult simplifiedcodes.com.

Dividends = an official distribution of cash or other assets to all shareholders of one class. Even though dividends are generally the only way shareholders as a group get a return on their investment (individual shareholders can also sell their shares, but that only puts the buyer of the shares into the seller's shoes), dividends are in the board's discretion (DGCL 170(a)).

Equity; equity capital = the excess of assets over liabilities, if any (or equivalently, non-debt financing).

Equity holders = shareholders. The term derives from the fact that roughly speaking, equity is available for distribution to shareholders.

Limited liability = no liability (of shareholders). The expression “limited” comes from the observation that shareholders stand to lose whatever they put into the corporation, as this is available to satisfy the corporations' creditors' claims. However, shareholders have no liability beyond that, absent pathological circumstances.

Merger = the fusion of two corporations into one (cf. DGCL 251).

Preferred stock / share = stock with special rights (“preferences”), generally with respect to dividends. A standard term is that preferred shares are entitled to a certain dividend per year, payable if and when a dividend will be paid to common stockholders. In return, preferred shares often do not carry voting rights.

Public corporation = a corporation whose stock is publicly traded, usually on a regulated stock exchange such as the New York Stock Exchange.

Share = an interest in the corporation with rights that are defined by the corporation’s charter. Unlike debt, shares do not provide a right to fixed payouts. Rather, the board decides if and when shareholders will receive so-called dividends. The default rule is that each share provides one vote (cf. DGCL 212) and equal dividend rights; such shares are called “common shares” or “common stock.”

Stock = a synonym or collective term for shares (as in “twenty shares of the corporation’s stock”).

5 Shareholder Litigation 5 Shareholder Litigation

It is often said that corporate fiduciary duties are a U.S. specialty. It would be more accurate to say that shareholder litigation is the U.S. specialty. Fiduciary duties or something resembling them exist in all corporate laws that we know of. Most jurisdictions, however, severely limit shareholder litigation that could enforce these duties, relying instead on prohibitions, shareholder approval requirements, or perhaps even criminal law enforcement. Not so the U.S., particularly Delaware.

U.S. law provides two avenues for shareholders to enforce fiduciary duties in court: the direct action, and the derivative action. The direct action is a suit in the shareholder-plaintiff’s own right (usually brought as a class action in the name of all such shareholders), whereas the derivative action is a suit on behalf of the corporation. The test for distinguishing direct vs. derivative actions in Delaware is

(1) who suffered the alleged harm (the corporation or the suing stock-holders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stock-holders, individually)?

— Tooley v. DLJ, 845 A. 2d 1031, 1033 (Del. 2004).

In practice, this means that shareholders can sue directly over mergers and other transactions that affect their status as shareholders, but not over transactions such as executive compensation that affect shareholders merely financially. For example, of the shareholder suit cases you have read so far, Van Gorkom was a direct (class) action, while Sinclair, Disney, and Marchand were derivative actions. The distinction matters because the demand requirement and the powers of the special litigation committee (see section A. below) apply only to derivative suits.

Like most litigation, shareholder litigation presents an obvious dilemma. On the one hand, fiduciary duties are toothless without shareholder litigation to enforce them. That is why courts encourage it with generous fee awards (see Americas Mining below). On the other hand, litigation is extremely expensive, especially the corporate sort. In particular, defendants can incur substantial costs in discovery even if the case never goes to trial, let alone results in a verdict for the plaintiff. In fiduciary duty suits, the main cost is the disruption caused by depositions of directors and managers and, more generally, their distraction from ordinary business. Opportunistic plaintiffs may threaten such litigation costs to extract a meritless settlement.

In other words, Delaware’s reliance on fiduciary duties creates a conundrum: how to encourage meritorious suits while discouraging deleterious nuisance suits. Meritorious suits are necessary to enforce fiduciary duties and allow the courts to flesh out their content, whereas nuisance suits can be a costly drag on the system. Do the procedural peculiarities introduced in this section succeed in sorting the good shareholder litigation from the bad?

5.1 Derivative Actions: Demand Futility Test and SLCs 5.1 Derivative Actions: Demand Futility Test and SLCs

Two important filters apply only to derivative actions, not direct actions: The “demand futility” test, and dismissal by a special litigation committee (SLC) of the board. In theory, both can lead to dismissal at any stage of a derivative action. In practice, the demand futility test is invoked virtually exclusively at the motion to dismiss stage, and SLCs tend to be formed after the motion to dismiss was denied, often prompting a stay of discovery until the SLC has given its recommendation.

The term “demand futility” derives from the somewhat quaint idea that, in principle, a dissatisfied shareholder should first ask the board to bring the lawsuit, i.e., make a “demand” on the board. The shareholder should be allowed to sue in the corporation’s name only (a) after the board wrongfully rejects the shareholder’s demand or (b) if a demand seems “futile” because the board is hopelessly conflicted. In practice, it is very rare for plaintiffs to make a formal demand, and even rarer for boards to accede to it. If the board were inclined to sue, it would not need the shareholder’s reminder, and in the practically relevant case where the board or some of its members are the potential defendant, the board will be very much not inclined to sue. The shareholder thus has little to gain from making a demand, but a lot to lose because Delaware courts consider a demand a concession that demand was not futile, i.e., that the board is impartial with respect to the suit. The only option for a shareholder whose demand was rejected would be to challenge the board’s procedure in rejecting the demand—a near impossible task under the business judgment rule. Thus, shareholders just sue, alleging demand futility.

Substantively, the demand futility test lets a shareholder derivative suit proceed only if a majority of the board appears partial as to the outcome of the suit. But the test of partiality is not mechanical. Most importantly, merely naming a director as defendant is not enough to disqualify that director. Nor is it enough to make abstract allegations. Rather, the shareholder-plaintiff must allege particularized facts that allow a reasonable inference that a director breached his or her duty, has a self-interest in the underlying transaction, or is connected to someone ticking either of these boxes. Crucially, this means the derivative plaintiff must be in possession of at least some pertinent incriminating facts before even being allowed to enter discovery. In the case of a derivative action against the entire board for violation of their duties, the demand futility test is thus a heightened pleading standard: the derivative complaint must allege particularized facts that suggest they may actually be liable. To meet this standard, would-be derivative plaintiffs make copious “books and records” requests under section 220 of the DGCL, often leading to separate “220 litigation” before a derivative lawsuit is even filed.

Demand futility is litigated in virtually every derivative action because defendants virtually always move to dismiss the complaint for failure to plead demand futility.

By contrast, special litigation committees are a rarer beast. This is in part because an SLC is unnecessary if the derivative action is dismissed for failure to plead demand futility, as most are. If the derivative action is not dismissed, boards often form an SLC composed of disinterested and independent directors and vested with the power to terminate the lawsuit should the continuation of the latter not serve the company's best interests. This forces courts into a balancing act:

If, on the one hand, corporations can consistently wrest bona fide derivative actions away from well-meaning derivative plaintiffs through the use of the committee mechanism, the derivative suit will lose much, if not all, of its generally-recognized effectiveness as an intra-corporate means of policing boards of directors. If, on the other hand, corporations are unable to rid themselves of meritless or harmful litigation and strike suits, the derivative action, created to benefit the corporation, will produce the opposite, unintended result. […]

The context here is a suit against directors where demand on the board is excused. We think some tribute must be paid to the fact that the lawsuit was properly initiated. [… W]e have to be concerned about the creation of an ‘Independent Investigation Committee’ […] years later, after the election of [some] new outside directors [who compose the committee]. Situations could develop where such motions could be filed after years of vigorous litigation for reasons unconnected with the merits of the lawsuit.

Moreover, notwithstanding our conviction that Delaware law entrusts the corporate power to a properly authorized committee, we must be mindful that directors are passing judgment on fellow directors in the same corporation and fellow directors, in this instance, who designated them to serve both as directors and committee members. The question naturally arises whether a ‘there but for the grace of God go I’ empathy might not play a role.

[…] We thus steer a middle course […]

After an objective and thorough investigation of a derivative suit, an independent committee may cause its corporation to file a pretrial motion to dismiss in the Court of Chancery. The basis of the motion is the best interests of the corporation, as determined by the committee. The motion should include a thorough written record of the investigation and its findings and recommendations. […] The Court should apply a two-step test to the motion.

First, the Court should inquire into the independence and good faith of the committee and the bases supporting its conclusions. Limited discovery may be ordered to facilitate such inquiries. The corporation should have the burden of proving independence, good faith and a reasonable investigation, rather than presuming independence, good faith and reasonableness. […]

The second step provides, we believe, the essential key in striking the balance between legitimate corporate claims as expressed in a derivative stockholder suit and a corporation's best interests as expressed by an independent investigating committee. The Court should determine, applying its own independent business judgment, whether the motion should be granted. […] The Court of Chancery of course must carefully consider and weigh how compelling the corporate interest in dismissal is when faced with a non-frivolous lawsuit. The Court of Chancery should, when appropriate, give special consideration to matters of law and public policy in addition to the corporation's best interests.

—Zapata Co. v. Maldonado, 430 A.2d. 779, 786-789 (Del. 1981) (footnotes and internal references omitted).

Questions
1. What is worse for derivative plaintiffs: dismissal because demand was not futile or later dismissal upon recommendation of an SLC?
2. What do you think the Zapata court means by the Chancery Court’s “own independent business judgment”?

5.1.1 United Food and Com. Workers Union v. Zuckerberg 5.1.1 United Food and Com. Workers Union v. Zuckerberg

Zuckerberg is now the authoritative statement of the demand futility test. It merged separate formulations of the test adopted in two prior precedents, Aronson and Rales, and decided the important question of the role of exculpated claims for demand futility purposes.

Questions
1. What is the three-part test adopted in Zuckerberg?
2. What is the role of exculpated claims for demand futility according to Zuckerberg? What alternative role did the plaintiff argue for? Does it even matter given that, by definition, exculpated claims cannot give rise to liability?

IN THE SUPREME COURT OF THE STATE OF DELAWARE

UNITED FOOD AND COMMERCIAL WORKERS UNION § AND PARTICIPATING FOOD INDUSTRY EMPLOYERS TRI-STATE PENSION FUND, Plaintiff-Below, Appellant,

MARK ZUCKERBERG, MARC ANDREESSEN, PETER THIEL, REED HASTINGS, ERSKINE B. BOWLES, and SUSAN D. DESMOND-HELLMANN, Defendants-Below, Appellees and FACEBOOK, INC., Nominal Defendant-Below, § Appellee.

No. 404, 2020

Court Below – Court of Chancery of the State of Delaware

Submitted: June 30, 2021

Decided: September 23, 2021

P. Bradford deLeeuw, Esquire, DELEEUW LAW LLC, Wilmington, Delaware; Robert C. Schubert, Esquire, Willem F. Jonckheer, Esquire (argued), SCHUBERT JONCKHEER & KOLBE LLP, San Francisco, California; James E. Miller, Esquire, SHEPHERD FINKELMAN MILLER & SHAH, LLP, Chester, Connecticut; Attorneys for Appellant United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund.

Kevin R. Shannon, Esquire, Berton W. Ashman, Jr., Esquire, Tyler J. Leavengood, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; William Savitt, Esquire (argued), Ryan A. McLeod, Esquire, Anitha Reddy, Esquire, Kevin M. Jonke, Esquire, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Appellees Marc L. Andreessen, Erskine B. Bowles, Susan D. Desmond-Hellman, Reed Hasting, and Peter Thiel.

Raymond J. DiCamillo, Esquire, Kevin M. Gallagher, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; George M. Garvey, Esquire, Laura Lin, Esquire, MUNGER, TOLLES & OLSON LLP, Los Angeles, California; Attorneys for Appellee Mark Zuckerberg.

David E. Ross, Esquire, Garrett B. Moritz, Esquire, R. Garrett Rice, Esquire, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Attorneys for Appellee Facebook, Inc.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en banc.

MONTGOMERY-REEVES, Justice:

In 2016, the board of directors of Facebook, Inc. (“Facebook”) voted in favor of a stock reclassification (the “Reclassification”) that would allow Mark Zuckerberg— Facebook’s controller, chairman, and chief executive officer—to sell most of his Facebook stock while maintaining voting control of the company. Zuckerberg proposed the Reclassification to allow him and his wife to fulfill a pledge to donate most of their wealth to philanthropic causes. With Zuckerberg casting the deciding votes, Facebook’s stockholders approved the Reclassification.

Not long after, numerous stockholders filed lawsuits in the Court of Chancery, alleging that Facebook’s board of directors violated their fiduciary duties by negotiating and approving a purportedly one-sided deal that put Zuckerberg’s interests ahead of the company’s interests. The trial court consolidated more than a dozen of these lawsuits into a single class action. At Zuckerberg’s request and shortly before trial, Facebook withdrew the Reclassification and mooted the fiduciary-duty class action. Facebook spent more than $20 million defending against the class action and paid plaintiffs’ counsel more than $68 million in attorneys’ fees under the corporate benefit doctrine.

Following the settlement, another Facebook stockholder—the United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund (“Tri-State”)—filed a derivative complaint in the Court of Chancery. This new action rehashed many of the allegations made in the prior class action but sought compensation for the money Facebook spent in connection with the prior class action.

Tri-State did not make a litigation demand on Facebook’s board. Instead, Tri-State pleaded that demand was futile because the board’s negotiation and approval of the Reclassification was not a valid exercise of its business judgment and because a majority of the directors were beholden to Zuckerberg. Facebook and the other defendants moved to dismiss Tri-State’s complaint under Court of Chancery Rule 23.1, arguing that Tri-State did not make demand or prove that demand was futile. Both sides agreed that thedemand futility test established in Aronson v. Lewis applied to Tri-State’s complaint.

In October 2020, the Court of Chancery dismissed Tri-State’s complaint under Rule 23.1. The court held that exculpated care claims do not excuse demand under Aronson’s second prong because they do not expose directors to a substantial likelihood of liability. The court also held that the complaint failed to raise a reasonable doubt that a majority of the demand board lacked independence from Zuckerberg. In reaching these conclusions, the Court of Chancery applied a three-part test for demand futility that blended the Aronson test with the test articulated in Rales v. Blasband.

Tri-State has appealed the Court of Chancery’s judgment. For the reasons provided below, this Court affirms the Court of Chancery’s judgment. The second prong of Aronson focuses on whether the derivative claims would expose directors to a substantial likelihood of liability. Exculpated claims do not satisfy that standard because they do not expose directors to a substantial likelihood of liability. Further, the complaint does not plead with particularity that a majority of the demand board lacked independence. Thus, the Court of Chancery properly dismissed Tri-State’s complaint for failing to make a demand on the board.

Additionally, this Opinion adopts the Court of Chancery’s three-part test for demand futility. When the Court decided Aronson, raising a reasonable doubt that the business judgment standard of review would apply exposed directors to a substantial likelihood of liability for care violations. The General Assembly’s enactment of Section 102(b)(7) and other developments in corporate law have weakened the connection between rebutting the business judgment standard and exposing directors to a risk that would sterilize their judgment with respect to a litigation demand. Further, the Aronson test has proved difficult to apply in many contexts, such as where there is turnover on a corporation’s board. The Court of Chancery’s refined articulation of the Aronson standard helps to address these issues. Nonetheless, this refined standard is consistent with Aronson, Rales, and their progeny. Thus, cases properly applying those holdings remain good law.

I. RELEVANT FACTS AND PROCEDURAL BACKGROUND

A. The Parties and Relevant Non-Parties

Appellee Facebook is a Delaware corporation with its principal place of business in California. Facebook is the world’s largest social media and networking service and one of the ten largest companies by market capitalization.

Appellant Tri-State has continuously owned stock in Facebook since September 2013.

Appellee Mark Zuckerberg founded Facebook and has served as its chief executive officer since July 2014. Zuckerberg controls a majority of Facebook’s voting power and has been the chairman of Facebook’s board of directors since January 2012.

Appellee Marc Andreessen has served as a Facebook director since June 2008. Andreessen was a member of the special committee that negotiated and recommended that the full board approve the Reclassification. In addition to his work as a Facebook director, Andreessen is a cofounder and general partner of the venture capital firm Andreessen Horowitz.

Appellee Peter Thiel has served as a Facebook director since April 2005. Thiel voted in favor of the Reclassification. In addition to his work as a Facebook director, Thiel is a partner at the venture capital firm Founders Firm.

Appellee Reed Hastings began serving as a Facebook director in June 2011 and was still a director when Tri-State filed its complaint. Hastings voted in favor of the Reclassification. In addition to his work as a Facebook director, Hastings founded and serves as the chief executive officer and chairman of Netflix, Inc. (“Netflix”).

Appellee Erskine B. Bowles began serving as a Facebook director in September 2011 and was still a director when Tri-State filed its complaint. Bowles was a member of the special committee that negotiated and recommended that the full board approve the Reclassification.

Appellee Susan D. Desmond-Hellman began serving as a Facebook director in March 2013 and was still a director when Tri-State filed its complaint. Desmond-Hellman was the chair of the special committee that negotiated and recommended that the full board approve the Reclassification. In addition to her work as a Facebook director, Desmond- Hellman served as the chief executive officer of the Bill and Melinda Gates Foundation (the “Gates Foundation”) during the events relevant to this appeal.

Sheryl Sandberg has been Facebook’s chief operating officer since March 2018 and has served as a Facebook director since January 2012.

Kenneth I. Chenault began serving as a Facebook director in February 2018 and was still a director when Tri-State filed its complaint. Chenault was not a director when Facebook’s board voted in favor of the Reclassification in 2016.

Jeffery Zients began serving as a Facebook director in May 2018 and was still a director when Tri-State filed its complaint. Zients was not a director when Facebook’s board voted in favor of the Reclassification in 2016.

B. Zuckerberg Takes the Giving Pledge

According to the allegations in the complaint, in December 2010, Zuckerberg took the Giving Pledge, a movement championed by Bill Gates and Warren Buffet that challenged wealthy business leaders to donate a majority of their wealth to philanthropic causes.

Zuckerberg communicated widely that he had taken the pledge and intended to start his philanthropy at an early age.

In March 2015, Zuckerberg began working on an accelerated plan to complete the Giving Pledge by making annual donations of $2 to $3 billion worth of Facebook stock. Zuckerberg asked Facebook’s general counsel to look into the plan. Facebook’s legal team cautioned Zuckerberg that he could only sell a small portion of his stock—$3 to $4 billion based on the market price—without dipping below majority voting control. To avoid this problem, the general counsel suggested that Facebook could follow the “Google playbook” and issue a new class of non-voting stock that Zuckerberg could sell without significantly diminishing his voting power. The legal team recommended that the board form a special committee of independent directors to review and approve the plan and noted that litigation involving Google’s reclassification resulted in a $522 million settlement. Zuckerberg instructed Facebook’s legal team to “start figuring out how to make this happen.”

C. The Special Committee Approves the Reclassification

At an August 20, 2015 meeting of Facebook’s board, Zuckerberg formally proposed that Facebook issue a new class of non-voting shares, which would allow him to sell a substantial amount of stock without losing control of the company. Zuckerberg also disclosed that he had hired Simpson Thacher & Bartlett LLP (“Simpson Thacher”) to give him personal legal advice about “what creating a new class of stock might look like.”

A couple of days later, Facebook established a special committee, which was composed of three purportedly-independent directors: Andreessen, Bowles, and Desmond- Hellman (the “Special Committee”). The board charged the Special Committee with evaluating the Reclassification, considering alternatives, and making a recommendation to the full board. The board also authorized the Special Committee to retain legal counsel, financial advisors, and other experts.

Facebook management recommended and the Special Committee hired Wachtell, Lipton, Rosen & Katz (“Wachtell”) as the committee’s legal advisor. Before meeting with the Special Committee, Wachtell called Zuckerberg’s contacts at Simpson Thacher to discuss the potential terms of the Reclassification. Simpson Thacher rejected as non-starters several features from the Google playbook, such as a stapling provision that would have required Zuckerberg to sell a share of his voting stock each time that he sold a share of the non-voting stock, and a true-up payment that would compensate Facebook’s other stockholders for the dilution of their voting power. By the time Wachtell first met with the Special Committee, the key contours of the Reclassification were already taking shape, and the Special Committee anticipated that the Reclassification would occur. Thus, the Special Committee focused on suggesting changes to the Reclassification rather than considering alternatives or threatening to reject the plan.

Following the recommendation of Bowles, the Special Committee hired Evercore Group L.L.C. (“Evercore”) as its financial advisor. Evercore was founded by Roger Altman, a personal friend of Bowles who had helped him with various political efforts. Evercore’s team leader observed that it had been hired “in the second inning” and that negotiations were well underway before it began to advise the Special Committee on the Reclassification.

As the negotiations progressed, the Special Committee largely agreed to give Zuckerberg the terms that he wanted and did not consider alternatives or demand meaningful concessions. For example, the Special Committee did not ask Zuckerberg to revisit any of the terms that Simpson Thacher identified as non-starters and did not try to place restrictions on Zuckerberg’s ability to sell as much stock as he wanted, for whatever purpose, on any timetable that he desired. Similarly, the Special Committee asked for only small concessions from Zuckerberg, such as a sunset provision that was designed to discourage Zuckerberg from leaving the company despite the absence of any demonstrable reason to believe that Zuckerberg would step away from his existing Facebook duties.

On November 9, 2015, Zuckerberg publicly reaffirmed the Giving Pledge. The next day, Zuckerberg circulated a draft announcement within Facebook that would disclose his intent to begin making large annual donations to complete the pledge. Zuckerberg asked for feedback on the announcement from various people, including Desmond- Hellman. Zuckerberg also informed Bowles and Andreessen of his planned announcement. Bowles and Andreessen told Zuckerberg that they were “proud” of him for taking the Giving Pledge and announcing his plan to begin donating his wealth to philanthropic causes. Zuckerberg also told Warren Buffett, Bill Gates, and Melinda Gates of his planned announcement. Melinda Gates forwarded an email that she received from Zuckerberg to Desmond-Hellman, adding a smiley-face emoji. At that time, Desmond- Hellman was the chief executive officer of the Gates Foundation.

A few weeks later, Zuckerberg published a post on his Facebook page announcing that he planned to begin making large donations of his Facebook stock. The post noted that Zuckerberg intended to “remain Facebook’s CEO for many, many years to come” and did not mention that his plan hinged on the Special Committee’s approval of the Reclassification. The Special Committee did not try to use the public announcement as leverage to extract more concessions from Zuckerberg.

Throughout the negotiations about the Reclassification, Andreessen engaged in facially dubious back-channel communications with Zuckerberg about the Special Committee’s deliberations. For example, during a March 2016 teleconference with the Special Committee, Zuckerberg pushed for an eight-year leave of absence. Andreessen sent Zuckerberg text messages during the meeting that provided live updates on which lines of argument were working and which were not. When confronted with these text messages later on, Desmond-Hellmann agreed that it appeared Andreessen had been “coaching” Zuckerberg through the negotiations.

On April 13, 2016, the Special Committee recommend that the full board approve the Reclassification. The next day, Facebook’s full board accepted the Special Committee’s recommendation and voted to approve the Reclassification. Zuckerberg and Sandberg abstained from voting on the Reclassification.

D. Facebook Settles a Class Action Challenging the Reclassification

On April 27, 2016, Facebook revealed the Reclassification to the public. The announcement was timed to coincide with the company’s best-ever quarterly earnings report. Evercore’s project leader, Altman, sent Desmond-Hellmann an email remarking, “Anytime [Facebook] announces earnings like that, no one will care about an equity recapitalization.”

On April 29, 2016, the first class action was filed in the Court of Chancery challenging the Reclassification. Several more similar complaints were filed, and in May 2016 the Court of Chancery consolidated thirteen cases into a single class action (the “Reclassification Class Action”).

On June 20, 2016, Facebook held its annual stockholders meeting. Among other things, the stockholders were asked to vote on the Reclassification. Zuckerberg voted all of his stock in favor of the plan. Including Zuckerberg’s votes, a majority of Facebook’s stockholders approved the Reclassification. More than three-quarters of the minority stockholders voted against the Reclassification.

On June 24, 2016, Facebook agreed that it would not go forward with the Reclassification while the Reclassification Class Action was pending. The Court of Chancery certified the Reclassification Class Action in April 2017 and tentatively scheduled the trial for September 26, 2017. About a week before the trial was scheduled to begin, Zuckerberg asked the board to abandon the Reclassification. The board agreed, and the next day Facebook filed a Form 8-K with the Securities and Exchange Commission disclosing that the company had abandoned the Reclassification and mooted the Class Action. The Form-8K also disclosed that despite abandoning the Reclassification, Zuckerberg planned to sell a substantial number of shares over the coming 18 months.

In a companion Facebook post, Zuckerberg explained that he “knew [the Reclassification] was going to be complicated and [that] it wasn’t a perfect solution.” The post continued, “Today I think we have a better one” that would allow Zuckerberg and his wife to “fully fund [our] philanthropy and retain voting control of Facebook for 20 years or more.” The post also clarified that this new plan would not “change [our] plans to give away 99% of our Facebook shares during our lives. In fact, we now plan to accelerate our work and sell more of those shares sooner.” By January 3, 2019, Zuckerberg had sold about $5.6 billion worth of Facebook stock without the Reclassification.

E. Tri-State Files a Class Action Seeking to Recoup the Money that Facebook Spent Defending and Settling the Reclassification Class Action

Facebook spent about $21.8 million defending the Reclassification Class Action, including more than $17 million on attorneys’ fees. Additionally, Facebook paid $68.7 million to the plaintiff’s attorneys in the Reclassification Class Action to settle a claim under the corporate benefit doctrine.

On September 12, 2018, Tri-State filed a derivative action in the Court of Chancery seeking to recoup the money that Facebook spent defending and settling the Reclassification Class Action. The complaint asserted a single count alleging that Zuckerberg, Andreessen, Thiel, Hastings, Bowles, and Desmond-Hellmann (collectively, the “Director Defendants”) breached their fiduciary duties of care and loyalty by improperly negotiating and approving the Reclassification. When Tri-State filed its complaint, Facebook’s board was composed of nine directors: Zuckerberg, Andreessen, Bowles, Desmond-Hellman, Hastings, Thiel, Sandberg, Chenault, and Zients (collectively, the “Demand Board”).

The complaint alleged that demand was excused as futile under Court of Chancery Rule 23.1 because “the Reclassification was not the product of a valid exercise of business judgment” and because “a majority of the Board face[d] a substantial likelihood of liability[] and/or lack[ed] independence.” Facebook and the Director Defendants moved to dismiss the complaint under Court of Chancery Rule 23.1 for failing to comply with the demand requirement.

On October 26, 2020, the Court of Chancery issued a memorandum opinion dismissing the complaint for failing to comply with Rule 23.1. The court held that demand was required because the complaint did not contain particularized allegations raising a reasonable doubt that a majority of the Demand Board received a material personal benefit from the Reclassification, faced a substantial likelihood of liability for approving the Reclassification, or lacked independence from another interested party.

Tri-State appeals the Court of Chancery’s judgment dismissing the derivative complaint under Rule 23.1 for failing to make a demand on the board or plead with particularity facts establishing that demand would be futile.

II. STANDARD OF REVIEW

“[O]ur review of decisions of the Court of Chancery applying Rule 23.1 is de novo and plenary.”

III. ANALYSIS

“A cardinal precept” of Delaware law is “that directors, rather than shareholders, manage the business and affairs of the corporation.” This precept is reflected in Section 141(a) of the Delaware General Corporation Law (“DGCL”), which provides that “[t]he business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors except as may be otherwise provided in this chapter or in [a corporation’s] certificate of incorporation.” The board’s authority to govern corporate affairs extends to decisions about what remedial actions a corporation should take after being harmed, including whether the corporation should file a lawsuit against its directors, its officers, its controller, or an outsider.

“In a derivative suit, a stockholder seeks to displace the board’s [decision-making] authority over a litigation asset and assert the corporation’s claim.” Thus, “[b]y its very nature[,] the derivative action” encroaches “on the managerial freedom of directors” by seeking to deprive the board of control over a corporation’s litigation asset. “In order for a stockholder to divest the directors of their authority to control the litigation asset and bring a derivative action on behalf of the corporation, the stockholder must” (1) make a demand on the company’s board of directors or (2) show that demand would be futile. The demand requirement is a substantive requirement that “‘[e]nsure[s] that a stockholder exhausts his intracorporate remedies,’ ‘provide[s] a safeguard against strike suits,’ and ‘assure[s] that the stockholder affords the corporation the opportunity to address an alleged wrong without litigation and to control any litigation which does occur.’”

Court of Chancery Rule 23.1 implements the substantive demand requirement at the pleading stage by mandating that derivative complaints “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” To comply with Rule 23.1, the plaintiff must meet “stringent requirements of factual particularity that differ substantially from . . . permissive notice pleadings.” When considering a motion to dismiss a complaint for failing to comply with Rule 23.1, the Court does not weigh the evidence, must accept as true all of the complaint’s particularized and well-pleaded allegations, and must draw all reasonable inferences in the plaintiff’s favor.

The plaintiff in this action did not make a pre-suit demand. Thus, the question before the Court is whether demand is excused as futile. This Court has articulated two tests to determine whether the demand requirement should be excused as futile: the Aronson test and the Rales test. The Aronson test applies where the complaint challenges a decision made by the same board that would consider a litigation demand. Under Aronson, demand is excused as futile if the complaint alleges particularized facts that raise a reasonable doubt that “(1) the directors are disinterested and independent[,] [or] (2) the challenged transaction was otherwise the product of a valid business judgment.” This reflects the “rule . . . that where officers and directors are under an influence which sterilizes their discretion, they cannot be considered proper persons to conduct litigation on behalf of the corporation. Thus, demand would be futile.”

The Rales test applies in all other circumstances. Under Rales, demand is excused as futile if the complaint alleges particularized facts creating a “reasonable doubt that, as of the time the complaint is filed,” a majority of the demand board “could have properly exercised its independent and disinterested business judgment in responding to a demand.” “Fundamentally, Aronson and Rales both ‘address the same question of whether the board can exercise its business judgment on the corporat[ion]’s behalf’ in considering demand.” For this reason, the Court of Chancery has recognized that the broader reasoning of Rales encompasses Aronson, and therefore the Aronson test is best understood as a special application of the Rales test.

While Delaware law recognizes that there are circumstances where making a demand would be futile because a majority of the directors “are under an influence which sterilizes their discretion” and “cannot be considered proper persons to conduct litigation on behalf of the corporation,” the demand requirement is not excused lightly because derivative litigation upsets the balance of power that the DGCL establishes between a corporation’s directors and its stockholders. Thus, the demand-futility analysis provides an important doctrinal check that ensures the board is not improperly deprived of its decision-making authority, while at the same time leaving a path for stockholders to file a derivative action where there is reason to doubt that the board could bring its impartial business judgment to bear on a litigation demand.

In this case, Tri-State alleged that demand was excused as futile for several reasons, including that the board’s negotiation and approval of the Reclassification would not be “protected by the business judgment rule” because “[t]heir approval was not fully informed” or “duly considered,” and that a majority of the directors on the Demand Board lacked independence from Zuckerberg. The Court of Chancery held that Tri-State failed to plead with particularity facts establishing that demand was futile and dismissed the complaint because it did not comply with Court of Chancery Rule 23.1.

On appeal, Tri-State raises two issues with the Court of Chancery’s demand-futility analysis. First, Tri-State argues that the Court of Chancery erred by holding that exculpated care violations do not satisfy the second prong of the Aronson test. Second, Tri-State argues that its complaint contained particularized allegations establishing that a majority of the directors on the Demand Board were beholden to Zuckerberg.

For the reasons provided below, this Court affirms the Court of Chancery’s judgment.

A. Exculpated Care Violations Do Not Satisfy Aronson’s Second Prong

The directors and officers of a Delaware corporation owe two overarching fiduciary duties—the duty of care and the duty of loyalty. “[P]redicated upon concepts of gross negligence,” the duty of care requires that fiduciaries inform themselves of material information before making a business decision and act prudently in carrying out their duties. The duty of loyalty “‘requires an undivided and unselfish loyalty to the corporation’ and ‘demands that there shall be no conflict between duty and self-interest.’” Tri-State alleges that the Director Defendants breached their duty of care in negotiating and approving the Reclassification. Section 102(b)(7) of the DGCL authorizes corporations to adopt a charter provision insulating directors from liability for breaching their duty of care:

“[T]he certificate of incorporation may . . . contain any or all of the following matters:

(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . . . or (iv) for any transaction from which the director derived an improper personal benefit.

Facebook’s charter contains a Section 102(b)(7) clause; as such, the Director Defendants face no risk of personal liability from the allegations asserted in this action. Thus, Tri-State’s demand-futility allegations raise the question whether a derivative plaintiff can rely on exculpated care violations to establish that demand is futile under the second prong of the Aronson test. The Court of Chancery held that exculpated care claims do not excuse demand because the second prong of the Aronson test focuses on whether a director faces a substantial likelihood of liability. Tri-State argues that this analysis was wrong because Aronson’s second prong focuses on whether the challenged transaction “satisfies the applicable standard of review,” not on whether directors face a substantial likelihood of liability.

The following discussion is divided into three parts. The first part affirms the Court of Chancery’s holding that, in light of subsequent developments, exculpated care claims do not excuse demand under Aronson’s second prong. The second part explains why Tri-State’s counterarguments do not change our analysis. The third part adopts the Court of Chancery’s three-part test as the universal test for demand futility.

1. The second prong of Aronson focuses on whether the directors face a substantial likelihood of liability

The main question on appeal is whether allegations of exculpated care violations can establish that demand is excused under Aronson’s second prong. According to Tri-State, the second prong excuses demand whenever the complaint raises a reasonable doubt that the challenged transaction was a valid exercise of business judgment, regardless of whether the directors face a substantial likelihood of liability for approving the challenged transaction. Thus, exculpated care violations can establish that demand is futile.

Tri-State’s argument hinges on the plain language of Aronson’s second prong, which focuses on whether “the challenged transaction was . . . the product of a valid business judgment”:

[I]n determining demand futility, the Court of Chancery

. . . must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid business judgment. Hence, the Court of Chancery must make two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of the challenged transaction and the board’s approval thereof.

Later opinions issued by this Court contain similar language that can be read to suggest that Aronson’s second prong focuses on the propriety of the challenged transaction. These passages do not address, however, why Aronson used the standard of review as a proxy for whether the board could impartially consider a litigation demand. The likely answer is that, before the General Assembly adopted Section 102(b)(7) in 1995, rebutting the business judgment rule through allegations of care violations exposed directors to a substantial likelihood of liability. Thus, even if the demand board was independent and disinterested with respect to the challenged transaction, the litigation presented a threat that would “sterilize [the board’s] discretion” with respect to a demand.

Aronson supports this conclusion. For example, in Aronson the Court noted that, although naming directors as defendants is not enough to establish that demand would be futile, “in rare cases a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of liability therefore exists. . . . [I]n that context demand is excused.” This passage helps to illuminate the connection that the Court drew between rebutting the business judgment rule and the board’s ability to consider a litigation demand. At that time, if the business judgment rule did not apply, allowing the derivative litigation to go forward would expose the directors to a substantial likelihood of liability for breach-of-care claims supported by well-pleaded factual allegations. It is reasonable to doubt that a director would be willing to take that personal risk. Thus, demand is excused.

On the other hand, if the business judgment rule would apply, allowing the derivative litigation to go forward would expose the directors to a minimal threat of liability. A remote threat of liability is not a good enough reason to deprive the board of control over the corporation’s litigation assets. Thus, demand is required.

Although not unanimous, the weight of Delaware authority since the enactment of Section 102(b)(7) supports holding that exculpated care violations do not excuse demand under Aronson’s second prong. For example, in Lenois, the Court of Chancery held that the second prong focuses on whether director-defendants face a substantial likelihood of liability:

[W]here an exculpatory charter provision exists, demand is excused as futile under the second prong of Aronson with a showing that a majority of the board faces a substantial likelihood of liability for non-exculpated claims. That a non- exculpated claim may be brought against less than a majority of the board or some other individual at the company, or that the board committed exculpated duty of care violations alone, will not affect the board’s right to control a company’s litigation.

In reaching that conclusion, Lenois examined several other Court of Chancery decisions holding that Section 102(b)(7) provisions are relevant when assessing whether demand should be excused under Aronson’s second prong:

In Higher Education Management Group, Inc v. Matthews, the Court of Chancery noted that because the corporation’s charter contained a Section 102(b)(7) provision, and the complaint did “not support an inference of bad faith conduct by a majority of the Director Defendants,” demand was required because “there would be no recourse for Plaintiffs and no substantial likelihood of liability if the Director Defendants’only failing was that they had not become fully ”
In Pfeiffer Leedle, the Court of Chancery held that demand was “excused under the second prong of Aronson” because the board committed “breaches of the duty of loyalty” that “cannot be exculpated” under the charter.
In In re Goldman Sachs, the Court of Chancery noted that where a corporation’s charter contains a Section 102(b)(7) provision, the second prong of Aronson requires that the plaintiff “plead particularized facts that demonstrate that the directors acted with scienter; e., there was an ‘intentional dereliction of duty’ or a ‘conscious disregard’ for their responsibilities, amount to bad faith.” In other words, to establish that making a demand would be futile under the second prong of Aronson a derivative complaint would have to raise a reasonable doubt that the directors faced a substantial likelihood of liability for committing non-exculpated breaches of their fiduciary duties.
In In re Lear, the Court of Chancery reached the same conclusion that where a corporation’s charter has a Section 102(b)(7) provision, “the plaintiffs [must] plead particularized facts supporting an inference that the directors committed a breach of their fiduciary duty of loyalty” by “act[ing] in bad ”
In Disney I, the Court of Chancery held that making a demand would be futile because the complaint raised a reasonable “doubt whether the board’s actions were taken honestly and in good faith,” exposing the directors to liability for non- exculpated breaches of their fiduciary

Several opinions issued after Lenois support the same analysis:

In Ellis Gonzalez, the Court of Chancery held that because the corporation’s charter contained a Section 102(b)(7) provision, “under either Aronson or Rales, the question . . . is the same: Does the Complaint adequately allege that a majority of . . . [the] board faces a substantial likelihood of liability for breaching the duty of loyalty?”
In Steinberg Bearden, the Court of Chancery’s demand-futility analysis focused on whether “a majority of the Board face[d] a substantial threat of personal liability . . . such that the Board could not consider a demand impartially.”

This Court’s opinion in In re Cornerstone Therapeutics, Inc. Stockholder Litigation, changed the landscape even more. Before Cornerstone, there was some uncertainty about how to apply a Section 102(b)(7) provision when deciding a motion to dismiss under Court of Chancery Rule 12(b)(6). Some courts held that an exculpation clause could warrant dismissing a complaint alleging care claims. Others, particularly where the entire fairness standard of review might apply, ruled that more factual development was needed to determine whether the director’s breach would be exculpated. Thus, a complaint alleging exculpated care violations might compromise a director’s ability to impartially consider a litigation demand by exposing them to the distraction of protracted litigation, public scrutiny, and potential reputational harm, even if the risk was low that the director would be found liable for breaching their fiduciary duties.

Cornerstone eliminated any uncertainty and held that where a corporation’s charter contains a Section 102(b)(7) provision, “[a] plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct.” Thus, under current law a Section 102(b)(7) provision removes the threat of liability and protracted litigation for breach of care claims. As such, Cornerstone eliminated “any continuing vitality from Aronson’s use of the standard of review for the challenged transaction as a proxy for whether directors face a substantial likelihood of liability sufficient to render demand futile.”

Accordingly, this Court affirms the Court of Chancery’s holding that exculpated care claims do not satisfy Aronson’s second prong. This Court’s decisions construing Aronson have consistently focused on whether the demand board has a connection to the challenged transaction that would render it incapable of impartially considering a litigation demand.

When Aronson was decided, raising a reasonable doubt that directors breached their duty of care exposed them to a substantial likelihood of liability and protracted litigation, raising doubt as to their ability to impartially consider demand. The ground has since shifted, and exculpated breach of care claims no longer pose a threat that neutralizes director discretion. These developments must be factored into demand-futility analysis, and Tri-State has failed to provide a reasoned explanation of why rebutting the business judgment rule should automatically render directors incapable of impartially considering a litigation demand given the current landscape. For these reasons, the Court of Chancery’s judgment is affirmed.

2. Tri-State’s other arguments do not change the analysis

Tri-State raises a few more counterarguments that do not change the Court’s analysis. First, Tri-State argues that construing the second prong of Aronson to focus on whether directors face a substantial likelihood of liability erases any distinction between the two prongs of the Aronson test. The argument goes like this. If directors face a substantial likelihood of liability for approving the challenged transaction, then they are interested with respect to the challenged transaction. The first prong of Aronson already addresses whether directors are interested in the challenged transaction. Thus, construing the second prong to require a substantial risk of liability makes it redundant. This argument misconstrues Aronson. The first prong of Aronson focuses on whether the directors had a personal interest in the challenged transaction (i.e., a personal financial benefit from the challenged transaction that is not equally shared by the stockholders). This is a different consideration than whether the directors face a substantial likelihood of liability for approving the challenged transaction, even if they received nothing personal from the challenged transaction. The second prong excuses demand in that circumstance. Thus, the first and second prongs of Aronson perform separate functions, even if those functions are complementary.

Second, Tri-State argues that this holding places an unfair burden on plaintiffs and will fail to deter controllers from pressuring boards to approve unfair transactions. Although not entirely clear, Tri-State appears to argue that because the entire fairness standard of review applies ab initio to a conflicted-controller transaction, demand is automatically excused under Aronson’s second prong. As the Court of Chancery noted below, some cases have suggested that demand is automatically excused under Aronson’s second prong if the complaint raises a reasonable doubt that the business judgment standard of review will apply, even if the business judgment rule is rebutted for a reason unrelated to the conduct or interests of a majority of the directors on the demand board. The Court of Chancery’s case law developed in a different direction, however, concluding that demand is not futile under the second prong of Aronson simply because entire fairness applies ab initio to a controlling stockholder transaction. As the Court of Chancery has explained, the theory that demand should be excused simply because an alleged controlling stockholder stood on both sides of the transaction is “inconsistent with Delaware Supreme Court authority that focuses the test for demand futility exclusively on the ability of a corporation’s board of directors to impartially consider a demand to institute litigation on behalf of the corporation—including litigation implicating the interests of a controlling stockholder.”

Further, Tri-State’s argument presumes that a stockholder has a general right to control corporate claims. Not so. The directors are tasked with managing the affairs of the corporation, including whether to file action on behalf of the corporation. A stockholder can only displace the directors if the stockholder alleges with particularity that “the directors are under an influence which sterilizes their discretion” such that “they cannot be considered proper persons to conduct litigation on behalf of the corporation.” As such, enforcing the demand requirement where a stockholder has only alleged exculpated conduct does not “undermine shareholder rights;” instead, it recognizes the delegation of powers outlined in the DGCL.

Finally, Tri-State’s argument collapses the distinction between the board’s capacity to consider a litigation demand and the propriety of the challenged transaction. It is entirely possible that an independent and disinterested board, exercising its impartial business judgment, could decide that it is not in the corporation’s best interest to spend the time and money to pursue a claim that is likely to succeed. Yet, Tri-State asks the Court to deprive directors and officers of the power to make such a decision, at least where the derivative action would challenge a conflicted-controller transaction. This rule may have its benefits, but it runs counter to the “cardinal precept” of Delaware law that independent and disinterested directors are generally in the best position to manage a corporation’s affairs, including whether the corporation should exercise its legal rights.

For these reasons, Tri-State cannot satisfy the demand requirement by pleading—for reasons unrelated to the conduct or interests of a majority of the directors on the demand board—that the entire fairness standard of review would apply to the Reclassification. Rather, to satisfy Rule 23.1, Tri-State must plead with particularity facts establishing that a majority of the directors on the demand board are subject to an influence that would sterilize their discretion with respect to the litigation demand.

Third, Tri-State argues that this holding is contrary to Brehm v. Eisner, H&N Management Group v. Couch, and McPadden. This Court’s opinion in Brehm contains language that can be read to suggest that the second prong of the Aronson test focuses on the propriety of the challenged transaction rather than on whether the directors face a substantial likelihood of liability for approving the transaction. For example, the Court’s demand-futility analysis focused on duty of care violations even though the opinion was issued after the legislature adopted Section 102(b)(7) and it appears that Disney’s corporate charter had an exculpation clause. Nonetheless, the Court did not hold that exculpated claims can establish demand futility, and on remand the plaintiff relied on non-exculpated claims to establish that demand was futile. Thus, Brehm did not hold that exculpated care violations can excuse demand under Aronson’s second prong.

H&N Management is inapposite because the corporation’s charter did not exculpate directors for breaches of the duty of care. Thus, the Court of Chancery did not address whether exculpated claims could excuse demand under the second prong of the Aronson test. This leaves McPadden, which appears to be the only Delaware decision squarely holding that exculpated care violations can excuse demand under the second prong of Aronson. It is understandable that the Court of Chancery reached this holding given the plain language of Aronson. Nonetheless, given the subsequent developments in Delaware law, it is our view that exculpated care violations no longer pose a sufficient threat to excuse demand under the second prong of the Aronson test. Rather, the second prong requires particularized allegations raising a reasonable doubt that a majority of the demand board is subject to a sterilizing influence because directors face a substantial likelihood of liability for engaging in the conduct that the derivative claim challenges.

3. This Court adopts the Court of Chancery’s three-part test for demand futility

This issue raises one more question—whether the three-part test for demand futility the Court of Chancery applied below is consistent with Aronson, Rales, and their progeny. The Court of Chancery noted that turnover on Facebook’s board, along with a director’s decision to abstain from voting on the Reclassification, made it difficult to apply the Aronson test to the facts of this case:

The composition of the Board in this case exemplifies the difficulties that the Aronson test struggles to overcome. The Board has nine members, six of whom served on the Board when it approved the Reclassification. Under a strict reading of Rales, because the Board does not have a new majority of directors, Aronson provides the governing test. But one of those six directors abstained from the vote on the Reclassification, meaning that the Aronson analysis only has traction for five of the nine. Aronson does not provide guidance about what to do with either the director who abstained or the two directors who joined the Board later. The director who abstained from voting on the Reclassification suffers from other conflicts that renders her incapable of considering a demand, yet a strict reading of Aronson only focuses on the challenged decision and therefore would not account for those conflicts. Similarly, the plaintiff alleges that one of the directors who subsequently joined the Board has conflicts that render him incapable of considering a demand, but a strict reading of Aronson would not account for that either. Precedent thus calls for applying Aronson, but its analytical framework is not up to the task. The Rales test, by contrast, can accommodate all of these considerations.

The court also suggested that in light of the developments discussed above, “Aronson is broken in its own right because subsequent jurisprudential developments have rendered non-viable the core premise on which Aronson depends—the notion that an elevated standard of review standing alone results in a substantial likelihood of liability sufficient to excuse demand. Perhaps the time has come to move on from Aronson entirely.”

To address these concerns, the Court of Chancery applied the following three-part test on a director-by-director basis to determine whether demand should be excused as futile:

whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;

whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and

whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand

or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

This approach treated “Rales as the general demand futility test,” while “draw[ing] upon Aronson-like principles when evaluating whether particular directors face a substantial likelihood of liability as a result of having participated in the decision to approve the Reclassification.”

This Court adopts the Court of Chancery’s three-part test as the universal test for assessing whether demand should be excused as futile. When the Court decided Aronson, it made sense to use the standard of review to assess whether directors were subject to an influence that would sterilize their discretion with respect to a litigation demand. Subsequent changes in the law have eroded the ground upon which that framework rested. Those changes cannot be ignored, and it is both appropriate and necessary that the common law evolve in an orderly fashion to incorporate those developments. The Court of Chancery’s three-part test achieves that important goal. Blending the Aronson test with the Rales test is appropriate because “both ‘address the same question of whether the board can exercise its business judgment on the corporat[ion]’s behalf’ in considering demand”; and the refined test does not change the result of demand-futility analysis.

Further, the refined test “refocuses the inquiry on the decision regarding the litigation demand, rather than the decision being challenged.” Notwithstanding text focusing on the propriety of the challenged transaction, this approach is consistent with the overarching concern that Aronson identified: whether the directors on the demand board “cannot be considered proper persons to conduct litigation on behalf of the corporation” because they “are under an influence which sterilizes their discretion.” The purpose of the demand- futility analysis is to assess whether the board should be deprived of its decision-making authority because there is reason to doubt that the directors would be able to bring their impartial business judgment to bear on a litigation demand. That is a different consideration than whether the derivative claim is strong or weak because the challenged transaction is likely to pass or fail the applicable standard of review. It is helpful to keep those inquiries separate. And the Court of Chancery’s three-part test is particularly helpful where, like here, board turnover and director abstention make it difficult to apply the Aronson test as written. Finally, because the three-part test is consistent with and enhances Aronson, Rales, and their progeny, the Court need not overrule Aronson to adopt this refined test, and cases properly construing Aronson, Rales, and their progeny remain good law.

Accordingly, from this point forward, courts should ask the following three questions on a director-by-director basis when evaluating allegations of demand futility:

whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;

whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and

whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation

If the answer to any of the questions is “yes” for at least half of the members of the demand board, then demand is excused as futile. It is no longer necessary to determine whether the Aronson test or the Rales test governs a complaint’s demand-futility allegations.

B. The Complaint Does Not Plead with Particularity Facts Establishing that Demand Would Be Futile

The second issue on appeal is whether Tri-State’s complaint pleaded with particularity facts establishing that a litigation demand on Facebook’s board would be futile. The Court resolves this issue by applying the three-part test adopted above on a director-by- director basis.

The Demand Board was composed of nine directors. Tri-State concedes on appeal that two of those directors, Chenault and Zients, could have impartially considered a litigation demand. And Facebook does not argue on appeal that Zuckerberg, Sandberg, or Andreessen could have impartially considered a litigation demand. Thus, in order to show that demand is futile, Tri-State must sufficiently allege that two of the following directors could not impartially consider demand: Thiel, Hastings, Bowles, and Desmond- Hellmann.

Tri-State concedes on appeal that neither Thiel, Hastings, Bowles, nor Desmond- Hellmann had a personal interest in the Reclassification. This eliminates the possibility that demand could be excused under the first prong of the demand-futility test, as none of the remaining four directors obtained a material personal benefit from the alleged misconduct that is the subject of the litigation demand.

Similarly, there is no dispute that Facebook has a broad Section 102(b)(7) provision; and Tri-State concedes on appeal that the complaint does not plead with particularity that Thiel, Hastings, Bowles, or Desmond-Hellmann committed a non- exculpated breach of their fiduciary duties with respect to the Reclassification. This eliminates the possibility that demand could be excused under the second prong of the demand-futility test, as none of the remaining four directors would face a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand. This leaves one unanswered question: whether the complaint pleaded with particularity facts establishing that two of the four remaining directors lacked independence from Zuckerberg.

“The primary basis upon which a director’s independence must be measured is whether the director’s decision is based on the corporate merits of the subject before the board, rather than extraneous considerations or influences.” Whether a director is independent “is a fact-specific determination” that depends upon “the context of a particular case.” To show a lack of independence, a derivative complaint must plead with particularity facts creating “a reasonable doubt that a director is . . . so ‘beholden’ to an interested director . . . that his or her ‘discretion would be sterilized.’”

“A plaintiff seeking to show that a director was not independent must satisfy a materiality standard.” The plaintiff must allege that “the director in question had ties to the person whose proposal or actions he or she is evaluating that are sufficiently substantial that he or she could not objectively discharge his or her fiduciary duties.” In other words, the question is “whether, applying a subjective standard, those ties were material, in the sense that the alleged ties could have affected the impartiality of the individual director.” “Our law requires that all the pled facts regarding a director’s relationship to the interested party be considered in full context in making the, admittedly imprecise, pleading stage determination of independence.” And while “the plaintiff is bound to plead particularized facts in . . . a derivative complaint, so too is the court bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative complaint is sought.”

“A variety of motivations, including friendship, may influence the demand futility inquiry. But, to render a director unable to consider demand, a relationship must be of a bias-producing nature.” Alleging that a director had a “personal friendship” with someone else, or that a director had an “outside business relationship,” are “insufficient to raise a reasonable doubt” that the director lacked independence. “Consistent with [the] predicate materiality requirement, the existence of some financial ties between the interested party and the director, without more, is not disqualifying.”

Like the Court of Chancery below, we hold that Tri-State failed to raise a reasonable doubt that either Thiel, Hastings, or Bowles was beholden to Zuckerberg.

1. Hastings

The complaint does not raise a reasonable doubt that Hastings lacked independence from Zuckerberg. According to the complaint, Hastings was not independent because:

“Netflix purchased advertisements from Facebook at relevant times,” and maintains “ongoing and potential future business relationships with”
According to an article published by The New York Times, Facebook gave to Netflix and several other technology companies “more intrusive access to users’ personal data than it ha[d] disclosed, effectively exempting those partners from privacy ”
“Hastings (as a Netflix founder) is biased in favor of founders maintaining control of their ”“Hastings has . . . publicly supported large philanthropic donations by founders during their lifetimes. Indeed, both Hastings and Zuckerberg have been significant contributors . . . [to] a well-known foundation known for soliciting and obtaining large contributions from company founders and which manages donor funds for both Hastings . . . and Zuckerberg ”

These allegations do not raise a reasonable doubt that Hastings was beholden to Zuckerberg. Even if Netflix purchased advertisements from Facebook, the complaint does not allege that those purchases were material to Netflix or that Netflix received anything other than arm’s length terms under those agreements. Similarly, the complaint does not make any particularized allegations explaining how obtaining special access to Facebook user data was material to Netflix’s business interests, or that Netflix used its special access to user data to obtain any concrete benefits in its own business.

Further, having a bias in favor of founder-control does not mean that Hastings lacks independence from Zuckerberg. Hastings might have a good-faith belief that founder control maximizes a corporation’s value over the long-haul. If so, that good-faith belief would play a valid role in Hasting’s exercise of his impartial business judgment.

Finally, alleging that Hastings and Zuckerberg have a track record of donating to similar causes falls short of showing that Hastings is beholden to Zuckerberg. As the Court of Chancery noted below, “[t]here is no logical reason to think that a shared interest in philanthropy would undercut Hastings’ independence. Nor is it apparent how donating to the same charitable fund would result in Hastings feeling obligated to serve Zuckerberg’s interests.” Accordingly, the Court affirms the Court of Chancery’s holding that the complaint does not raise a reasonable doubt about Hastings’s independence.

2. Thiel

The complaint does not raise a reasonable doubt that Thiel lacked independence from Zuckerberg. According to the complaint, Thiel was not independent because:

“Thiel was one of the early investors in Facebook,” is “its longest-tenured board member besides Zuckerberg,” and “has . . . been instrumental to Facebook’s business strategy and direction over the years”
“Thiel has a personal bias in favor of keeping founders in control of the companies they created...”
The venture capital firm at which Thiel is a partner, Founders Fund, “gets ‘good deal flow’” from its “high-profile association with Facebook”
“According to Facebook’s 2018 Proxy Statement, the Facebook shares owned by the Founders Fund (i.e., by Thiel and Andreessen) will be released from escrow in connection with” an acquisition.
“Thiel is Zuckerberg’s close friend and mentor”
In October 2016, Thiel made a $1 million donation to an “organization that paid [a substantial sum to] Cambridge Analytica” and “cofounded the Cambridge Analytica-linked data firm ” Even though “[t]he Cambridge Analytica scandal has exposed Facebook to regulatory investigations” and litigation, Zuckerberg did not try to remove Thiel from the board.

Similarly, Thiel’s “acknowledge[ment] that he secretly funded various lawsuits aimed at bankrupting [the] news website Gawker Media” lead to “widespread calls for Zuckerberg to remove Thiel from Facebook’s Board given Thiel’s apparent antagonism toward a free ” Zuckerberg ignored those calls and did not seek to remove Thiel from Facebook’s board.

These allegations do not raise a reasonable doubt that Thiel is beholden to Zuckerberg. The complaint does not explain why Thiel’s status as a long-serving board member, early investor, or his contributions to Facebook’s business strategy make him beholden to Zuckerberg. And for the same reasons provided above, a director’s good faith belief that founder controller maximizes value does not raise a reasonable doubt that the director lacks independence from a corporation’s founder.

While the complaint alleges that Founders Fund “gets ‘good deal flow’” from Thiel’s “high-profile association with Facebook,” the complaint does not identify a single deal that flowed to—or is expected to flow to—Founders Fund through this association, let alone any deals that would be material to Thiel’s interests. The complaint also fails to draw any connection between Thiel’s continued status as a director and the vesting of Facebook stock related to the acquisition. And alleging that Thiel is a personal friend of Zuckerberg is insufficient to establish a lack of independence.

The final pair of allegations suggest that because “Zuckerberg stood by Thiel” in the face of public scandals, “Thiel feels a sense of obligation to Zuckerberg.” These allegations can only raise a reasonable doubt about Thiel’s independence if remaining a Facebook director was financially or personally material to Thiel. As the Court of Chancery noted below, given Thiel’s wealth and stature, “[t]he complaint does not support an inference that Thiel’s service on the Board is financially material to him. Nor does the complaint sufficiently allege that serving as a Facebook director confers such cachet that Thiel’s independence is compromised.” Accordingly, this Court affirms the Court of Chancery’s holding that the complaint does not raise a reasonable doubt about Thiel’s independence.

3. Bowles

The complaint does not raise a reasonable doubt that Bowles lacked independence from Zuckerberg. According to the complaint, Thiel was not independent because:

“Bowles is beholden to the entire board” because it granted “a waiver of the mandatory retirement age for directors set forth in Facebook’s Corporate Governance Guidelines,” allowing “Bowles to stand for reelection despite having reached 70 years old before” the May 2018 annual
“Morgan Stanley—a company for which [Bowles] . . . served as a longstanding board member at the time (2005-2017)—directly benefited by receiving over $2 million in fees for its work . . . in connection with the Reclassification...”

Bowles “ensured that Evercore and his close friend Altman financially benefitted from the Special Committee’s engagement” without properly vetting Evercore’s competency or considering

These allegations do not raise a reasonable doubt that Bowles is beholden to Zuckerberg or the other members of the Demand Board. The complaint does not make any particularized allegation explaining why the board’s decision to grant Bowles a waiver from the mandatory retirement age would compromise his ability to impartially consider a litigation demand or engender a sense of debt to the other directors. For example, the complaint does not allege that Bowles was expected to do anything in exchange for the waiver, or that remaining a director was financially or personally material to Bowles.

The complaint’s allegations regarding Bowles’s links to financial advisors are similarly ill-supported. None of these allegations suggest that Bowles received a personal benefit from the Reclassification, or that Bowles’s ties to these advisors made him beholden to Zuckerberg as a condition of sending business to Morgan Stanley, Evercore, or his “close friend Altman.” Accordingly, this Court affirms the Court of Chancery’s holding that the complaint does not raise a reasonable doubt about Bowles’s independence.

IV. CONCLUSION

For the reasons provided above, the Court of Chancery’s judgment is affirmed.

5.1.2 City of Coral Springs Police Officers' Pension Plan v. Dorsey 5.1.2 City of Coral Springs Police Officers' Pension Plan v. Dorsey

Dorsey nicely illustrates the joint operation of substantive standards of review and the demand futility test.

Questions
1. If the case had reached the merits, what would have been the standard of review applicable to (a) Dorsey and (b) the other directors? Would they have made it easy or hard to win for the plaintiff?
2. Would the outcome of the case have changed if Dorsey had owned not around 50% but 1% or 80% of Block’s voting power? If the transaction had been a purchase not of Jay-Z’s business but of Dorsey’s other business or house or whatever?
3. What if the transaction at issue had been a squeeze-out merger (infra Part III:Chapter 7), i.e., a transaction where Dorsey uses his voting power to convert other shareholders’ shares into cash such that Dorsey remains as the sole owner of Block?
4. Based on your previous answers, would you be concerned about litigation risk (a) as a controlling stockholder doing whatever you want or (b) as an outside director who thinks you are doing your job?
5. In light of the foregoing questions, do you think the demand futility test is appropriate, too strict, or too lenient?

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CITY OF CORAL SPRINGS POLICE

OFFICERS’ PENSION PLAN, derivatively on behalf of BLOCK, INC.,

Plaintiff,

JACK DORSEY, ROELOF BOTHA, AMY BROOKS, PAUL DEIGHTON, RANDY GARUTTI, JIM MCKELVEY, MARY MEEKER, ANNA PATTERSON, LAWRENCE SUMMERS, DAVID VINIAR, and DARREN WALKER,

Defendants,

and BLOCK, INC.,

Nominal Defendant.

)

C.A. No. 2022-0091-KSJM

MEMORANDUM OPINION

Date Submitted: January 10, 2023

Date Decided: May 9, 2023

Thomas Curry, Tayler D. Bolton, SAXENA WHITE P.A., Wilmington, Delaware; David Wales, Sara DiLeo, SAXENA WHITE P.A., White Plains, New York; Adam Warden, Jonathan Lamet, SAXENA WHITE P.A., Boca Raton, Florida; Counsel for Plaintiff City of Coral Springs Police Officers’ Pension Plan.

Raymond J. DiCamillo, Kevin M. Gallagher, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Colin B. Davis, Katie Beaudin, GIBSON DUNN & CRUTCHER LLP, Irvine, California; Brian M. Lutz, GIBSON DUNN & CRUTCHER LLP, San Francisco, California; Lissa M. Percopo, GIBSON DUNN & CRUTCHER LLP, Washington, D.C.; Counsel for Defendants Jack Dorsey, Roelof Botha, Amy Brooks, Paul Deighton, Randy Garutti, Jim McKelvey, Mary Meeker, Anna Patterson, Lawrence Summers, David Viniar, and Darren Walker, and Nominal Defendant Block, Inc.

MEMORANDUM OPINION

McCORMICK, C.

The plaintiff, a stockholder of Block, Inc., filed this derivative suit challenging Block’s acquisition of TIDAL—a music streaming company associated with rapper, producer, and entrepreneur Shawn Carter. Block facilitates payment processing and helps individuals transfer money electronically; it had never ventured into the music streaming industry and, at the time it acquired TIDAL, had no plans to do so. The idea for the acquisition came to Jack Dorsey—Block’s founder, CEO, and Chairman—when he was summering with Carter in the Hamptons. From his Hamptons retreat, Dorsey joined a videoconference meeting of Block’s board and proposed that Block acquire TIDAL. The board formed a transaction committee to consider the proposal.

Over the ensuing months, the committee learned that TIDAL was failing financially, losing its major contracts, and facing an ongoing criminal investigation. The committee also learned that Carter personally loaned TIDAL $50 million to help the troubled company through its difficulties and that Dorsey was the sole Block management member in support of the acquisition. Despite the obvious problems with the deal, the committee approved the transaction for $306 million. It seemed, by all accounts, a terrible business decision.

Under Delaware law, however, a board comprised of a majority of disinterested and independent directors is free to make a terrible business decision without any meaningful threat of liability, so long as the directors approve the action in good faith.

The defendants moved to dismiss the complaint for failure to plead demand futility. That motion hinges on whether the plaintiff adequately alleges that the committee members would face a substantial likelihood of liability for approving the transaction. The plaintiff did not meet that pleading burden. The case is dismissed.

I. FACTUAL BACKGROUND

The facts are drawn from the Verified Stockholder Derivative Complaint (the “Complaint”) and documents it incorporates by reference, including meeting minutes and associated materials that were referenced or quoted in the Complaint.

A. Block And Its Board

Block, a California-based company, offers products and services that help businesses facilitate payment processing and help individuals transfer money electronically. Block’s net income in 2019 and 2020 was $375.4 million and $213.1 million, respectively.

Dorsey founded Block and took the Company public in 2015. He is Block’s President and CEO, and he serves as Chairman of Block’s Board of Directors (the “Board”). According to Block’s public filings, Dorsey held between 48.08% and 51.32% of the Company’s total stockholder voting power at relevant times.

At the time of the acquisition, the Board comprised eleven members: Dorsey and Defendants Roelof Botha, Amy Brooks, Paul Deighton, Randy Garutti, Jim McKelvey, Mary Meeker, Anna Patterson, Lawrence Summers, David Viniar, and Darren Walker (collectively, “Defendants”).

B. Carter’s Acquisition And Attempted Revamp Of TIDAL

Carter, known professionally as “Jay-Z,” is a rapper, record producer, and entrepreneur. In 2015, a group of recording artists led by Carter acquired a Norwegian music streaming company, formerly called Aspiro, for $56 million and rebranded it as TIDAL. Carter spearheaded these efforts and served as the public face of TIDAL. He also held a 27% stake in the company. Along with his partners, Carter launched a campaign for TIDAL to break into the music streaming industry as an artist-friendly platform.

The campaign was unsuccessful. By mid-2020, TIDAL had amassed only 2.1 million paying subscribers, which compared poorly to competitors like Spotify (138 million paying subscribers), Apple Music (60 million), and Amazon Music (55 million). TIDAL had logged multimillion-dollar losses for each of the preceding ten quarters. Carter personally extended a $50 million loan to TIDAL in 2020.

TIDAL’s operations also showed signs of distress. Between 2015 and 2020, TIDAL had churned through five different CEOs. The Company’s contracts with music labels were semi-formal at best; some had expired. TIDAL had incurred substantial unpaid liabilities to music labels for streaming fees. In a public fallout, TIDAL lost its exclusive streaming arrangement with recording artist Kanye West. To top it all off, the Company was facing an ongoing criminal investigation in Norway for artificially inflating its streaming numbers.

C. Dorsey Proposes That Block Acquire TIDAL

Dorsey and Carter are friends. They share interests in cryptocurrency and philanthropy. Dorsey publicly supported Carter’s acquisition of TIDAL in 2015, tweeting, “I appreciate & respect people who depart from their strengths and take on new challenges. Been using Tidal & digging it!” In April 2020, they jointly issued grants for COVID-19 relief totaling $6.2 million. Dorsey donated $10 million to Carter’s nonprofit, Reform Alliance, in May 2020.

While their families were summering together in the Hamptons, Dorsey and Carter began discussing a potential acquisition of TIDAL by Block. On August 25, 2020, Dorsey joined the Board’s regularly scheduled meeting by videoconference from the Hamptons. During the meeting, Dorsey raised the idea that Block acquire TIDAL. The meeting minutes reflect the Board’s discussion of strategic rationales, proposed valuations, and the Company’s potential integration strategies. The Board then “instructed management to continue to evaluate such transactions including through additional due diligence and negotiation of a letter of intent.” The Board resolved to establish a transaction committee to review any potential acquisition of TIDAL by unanimous written consent (the “Transaction Committee”).

The proposed Transaction Committee members were four independent directors: Botha, Brooks, Meeker, and Walker (the “Committee Defendants”). The resolution authorized the Transaction Committee to retain advisers to evaluate a potential acquisition and granted it the authority to approve a purchase. All directors excluding Dorsey signed their written consents on August 26, 2020. Two days later, on August 28, Dorsey executed his written consent, and the Transaction Committee was officially formed.

Meanwhile, Dorsey drafted and submitted a non-binding letter of intent for Block to purchase TIDAL for $554.8 million.

D. The Transaction Committee’s First Meeting

The Transaction Committee convened by videoconference for its first meeting on September 29, 2020. The meeting lasted 35 minutes. Dorsey and members of Block’s legal team attended the meeting and were present for its duration. The Transaction Committee discussed TIDAL’s competitive landscape and Block’s proposed product development strategies. Dorsey then “provided his perspective on the transaction as well as the interim management strategy should the transaction move forward.”

In advance of its first meeting, the Transaction Committee received three reports from Block management analyzing a potential acquisition of TIDAL. The reports included general background on the music industry, an outline of Block’s strategic goals in entering the industry, and a preliminary analysis of the investments Block would need to make into TIDAL to make it successful. None of the three reports contained management’s valuation of the proposed acquisition. The third report, delivered the day before the Transaction Committee’s first meeting, was the first time that management informed the Transaction Committee that Dorsey and his team had submitted a letter of intent a month earlier.

E. The Transaction Committee’s Second Meeting

Block management provided the Transaction Committee with its fourth written report on October 14, 2020. Management reported that TIDAL had only amassed 2.1 million paying subscribers and that growing this number would prove difficult. Management reasoned that “Spotify is synonymous with music streaming,” and Apple Music and Amazon Music had largely captured the remaining market share. The report also apprised the board that TIDAL had generated negative EBITDA of $39 million in 2019 and of Carter’s $50 million loan to the company.

Management further revealed that TIDAL operated under semi-formal or expired arrangements with these labels, capitalizing on the influence of the prominent artists who were partial owners of TIDAL. The report warned that TIDAL’s relationships with these labels could sour following an acquisition by Block.

The report highlighted other potential risks in an acquisition, such as the ongoing criminal probe by the Norwegian government and a federal lawsuit brought by artists alleging that TIDAL had withheld their owed royalties. TIDAL’s relationships with its artists were also faltering, and rapper Kanye West had withdrawn from his exclusive streaming arrangement with TIDAL for one of his albums due to piracy issues.

Management set an “[e]xpected purchase price” of $550–750 million. They reached this conclusion based on: comparables analyses with Spotify, Apple Music, and Amazon Music; comparables analyses with private precedent transactions; discounted cash flows analysis derived from TIDAL’s management forecasts; and TIDAL’s representations that it was in discussions with an undisclosed third party for a loan that valued TIDAL at $500–600 million.

The Transaction Committee convened for its second meeting on October 20, 2020. Dorsey and his management team presented on the October 14 report and additional financial information from TIDAL. Among other things, management informed the Transaction Committee that TIDAL had recorded multimillion-dollar losses in each of its previous ten quarters. These losses, management reported, would dilute Block’s earnings for at least three years and potentially create volatility in its stock price. Management’s presentation acknowledged that TIDAL’s existing contracts with its artists had expired, yet management valued TIDAL’s “intangible” artist relationships at $231 million. Management also presented on TIDAL’s accrued liabilities of $127 million, primarily from amounts owed to record labels for streaming fees.

In a section called “Committee Q&A,” the presentation addressed 18 multi-part, complex questions from Transaction Committee members, and the answers to these questions spanned 14 single-spaced slides in the presentation. One member asked, “Who are internal advocates for transactions? Is there sufficient buy in?” The slide reported that Dorsey was still “the primary sponsor of the deal” and that he was “the only one who is strongly advocating to move forward.” The slide also stated that there was “substantial push back from Core members,” i.e., Block’s senior executives, and that neither of Block’s two business unit leaders, Alyssa Henry and Brian Grassadonia, were advocating for the transaction.

Another Transaction Committee member asked whether TIDAL artists had any legal commitment to maintain their relationship with the platform following a merger. The presentation stated that “existing artists will have no legal obligation to [Block]; we are counting on their economic incentives as owners to drive future contributions to the growth and success of [TIDAL].” In response to a follow-up question requesting a “Drilldown” on the specifics of artists’ commitment, the presentation again acknowledged that the agreements “may be difficult to enforce legally, we will largely be relying on Jay-Z’s influence with them” to secure performance. When asked about the value of these artist relationships, management responded that “we do not have a concrete view on the value of the artist shareholders.”

One Transaction Committee member asked for the one-month, six-month, and one- to-three-year plans for assimilating and building the business. The response admitted that “[w]e do not have this level of detail at this stage” and acknowledged that “the lack of a clear operational/strategic lead here remains one of the greatest risks.” In the “Investor Relations Plan” section, the presentation described the framing to investors as follows: “While it is a big opportunity, the bet we are taking today is small relative to the size of Square.”

Despite these concerns, management informed the Transaction Committee that they intended to enter a deal term sheet in which Block would acquire approximately 90% of TIDAL at an enterprise valuation of $490 million. Certain member artists would retain the remaining 10% stake.

The October 20 meeting lasted an hour, and Dorsey was present for the entirety of the meeting. In closing, the Transaction Committee “instructed management to continue pursuing the transaction and update the Committee as negotiations progress.”

The Transaction Committee updated the full Board at its regularly scheduled meeting the next day, October 21. According to the Board minutes, Transaction Committee member Brooks provided an update on “the work that the deal team has undertaken and the discussions that the Transaction Committee of the Board have had in connection with the review of the target and the negotiation of a potential term sheet.” The Transaction Committee’s update was one of 14 items of business discussed at the October 21 Board meeting.

F. Block And TIDAL Agree On A Term Sheet.

On November 10, 2020, Block entered a term sheet to purchase a majority interest in TIDAL. A few days later, Dorsey and Carter were spotted vacationing together in Hawaii.

The Transaction Committee did not convene again until January 22, 2021. The meeting lasted an hour, according to the minutes. Dorsey and his team presented to the Transaction Committee members on the proposed transaction. Based on TIDAL’s failure to meet its management’s forecasts for 2020, and the likely scenario that T-Mobile would soon pull out of a significant partnership with TIDAL, Block’s management reduced its valuation of TIDAL to $350 million.

Block’s management estimated that TIDAL would generate its own negative EBITDA of $15.8 million in 2021, $24.5 million in 2022, and $32.4 million in 2023. Based on management’s projected capital infusions that Block would need to make into its TIDAL investment, they predicted the acquisition would generate negative EBITDA for Block of $35.6 million in 2021, $55 million in 2022, and $68.3 million in 2023.

Management downplayed the bad news as minor within the greater scheme of Block’s financial success. In another Committee Q&A in the January 22 presentation, the Committee members posed at least ten new questions and reviewed answers spanning eight slides. The Committee asked about the 8% to 10% drag on EBITDA. Management assuaged the Committee that the TIDAL acquisition “doesn’t move the needle on our gross profit growth rate given [TIDAL’s] relative magnitude.” Management also responded to questions about the acquisition’s scale, noting that a $350 million purchase price would only constitute 0.35% of Block’s $100 billion market capitalization.

Like in the October 20 meeting, the Transaction Committee pressed management for more details on artists’ legal obligations to continue working with TIDAL post- acquisition. Management responded that “whether an artist contributes to the platform or not, there would be no recourse for [Block] to take.” When pressed on the basis for “how we will win” in the market, the presentation stated plainly that the “[m]ost important driver here will be Jack’s and Jay’s vision.”

Ultimately, Dorsey proposed a purchase price of $309 million to acquire an 88% stake in TIDAL, implying a $350 million total enterprise valuation. Carter would retain an 8% stake, and other artist partners would hold the remaining 4% interest. The presentation set forth the acquisition as more of an assumption than an open question: “We will update the Committee once we have finalized terms we are comfortable with, and unless there are additional remaining questions, we can circulate a UWC to the Committee to approve the transaction.”

The Transaction Committee concluded that management should continue pursuing the transaction and update it as negotiations progressed. The Transaction Committee provided the full Board with an update on the proposed transaction at its regularly scheduled meeting on February 11.

G. The Transaction Committee Approves The Acquisition.

Without any further meetings, the Transaction Committee approved the acquisition by unanimous written consent on February 25, 2021. The Company announced the deal on March 4, after which its stock price decreased by 7%. In an 8-K filed two days later, the Company reported that it would pay consideration of approximately $306 million, subject to adjustments, for an ownership stake of approximately 87.5%.

Block closed the deal on April 30, 2021. In its 10-Q filed on November 4, 2021, Block disclosed that, after adjustments, it ultimately paid $237.3 million for an ownership interest of 86.23%. For accounting purposes, Block characterized $198 million of the purchase price as “Goodwill.” After the transaction closed, Carter joined the Board as a twelfth member.

Also in February 2021, Dorsey and Carter continued to partner in their personal lives, creating an endowment to fund bitcoin development in India and Africa. Their joint contributions to this endowment totaled $23.6 million.

H. This Litigation

Plaintiff City of Coral Springs Police Officers’ Pension Plan (“Plaintiff”) is a beneficial owner of Block common stock. Before filing this action, Plaintiff made a demand for books and records pursuant to 8 Del. C. § 220, and Block produced documents in response.

Plaintiff filed this derivative action on January 27, 2022. The Complaint asserts two causes of action challenging the TIDAL acquisition as a breach of fiduciary duty— Count I against Dorsey as a controller and Count II against the directors on the Board at the time the transaction was approved. Defendants moved to dismiss the Complaint. The motion was fully briefed, and the court heard oral argument on January 10, 2023.

II. LEGAL ANALYSIS

Defendants moved to dismiss the Amended Complaint pursuant to Court of Chancery Rules 23.1 and 12(b)(6). Because the Rule 23.1 motion results in dismissal, the court does not reach the Rule 12(b)(6) motion.

“A cardinal precept of [Delaware law] is that directors, rather than shareholders, manage the business and affairs of the corporation.” “In a derivative suit, a stockholder seeks to displace the board’s authority over a litigation asset and assert the corporation’s claim.” Because derivative litigation impinges on the managerial freedom of directors in this way, “a stockholder only can pursue a cause of action belonging to the corporation if (i) the stockholder demanded that the directors pursue the corporate claim and they wrongfully refused to do so or (ii) demand is excused because the directors are incapable of making an impartial decision regarding the litigation.” The demand requirement is a substantive principle under Delaware law. Rule 23.1 is the “procedural embodiment of this substantive principle.”

Under Rule 23.1, stockholder plaintiffs must “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” Stockholders choosing to allege demand futility must meet the “heightened pleading requirements,” alleging “particularized factual statements that are essential to the claim.” “Plaintiffs are entitled to all reasonable factual inferences that logically flow from the particularized facts alleged, but conclusory allegations are not considered as expressly pleaded facts or factual inferences.”

In Zuckerberg, the Delaware Supreme Court affirmed and thereby adopted Vice Chancellor Laster’s “universal test” for demand futility that blends elements of the two precursor tests: Aronson and Rales. When conducting a demand futility analysis under Zuckerberg, Delaware courts ask, on a director-by-director basis:

whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and
whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

“If the answer to any of the questions is ‘yes’ for at least half of the members of the demand board, then demand is excused as futile.” While the Zuckerberg test displaced the prior tests from Aronson and Rales, cases properly applying Aronson and Rales remain good law.

As of the date when Plaintiff filed their complaint, the Board comprised twelve directors: Dorsey, Carter, the Committee Defendants, and the remaining six Defendants (Deighton, Garutti, McKelvey, Patterson, Summers, and Viniar). To defeat Defendants’ Rule 23.1 motion, Plaintiff must impugn the impartiality of at least six directors under Zuckerberg.

Generally, demand futility is assessed on a claim-by-claim, or Count-by-Count, basis. In this case, however, the two Counts are based on the same factual predicate— the Board’s approval of the TIDAL acquisition. The sole distinction is in named defendants—Dorsey in Count I and the rest of the Board who approved the transaction in Count II. Because the difference in defendants does not alter the outcome, this decision consolidates the analysis of the two Counts.

Plaintiff focuses its arguments on Carter, Dorsey, and the four Committee Defendants. Plaintiff argues that: Carter is disqualified because he received a material personal benefit from the TIDAL acquisition; Dorsey’s relationship with Carter made him incapable of impartially considering a demand concerning the TIDAL acquisition; and the Committee Defendants face a substantial likelihood of liability from claims challenging the TIDAL acquisition.

The analysis as to Carter and Dorsey goes Plaintiff’s way. Defendants concede that Carter is interested in the transaction. And there are good arguments that Dorsey lacks independence from Carter for the purpose of the TIDAL acquisition. When supported by specific factual allegations, “professional or personal friendships, which may border on or even exceed familial loyalty and closeness, may raise a reasonable doubt whether a director can appropriately consider demand.” “[T]he heightened strength of relationship required to” raise a reasonable doubt as to a director’s independence “renders allegations concerning most ordinary relationships of limited value, at most.” Two recent Delaware Supreme Court decisions addressing the independence analysis under Rule 23.1 urge the court to evaluate personal relationships in a commonsense manner. Applying this commonsense approach to Dorsey and Carter’s relationship, Plaintiff has the better side of the argument. It is reasonably conceivable that Dorsey used corporate coffers to bolster his relationship with Carter. But the court need not delve too deeply into this issue, because Plaintiff has failed to meet its burden as to the remaining ten directors.

Plaintiff argues that demand is futile as to the Committee Defendants because they face a substantial likelihood of liability from the subject matter of the litigation demand. Where, as here, the corporation’s certificate of incorporation exculpates its directors from liability to the fullest extent permitted by law, the substantial-likelihood standard requires that a plaintiff “plead particularized facts providing a reason to believe that the individual director was self-interested, beholden to an interested party, or acted in bad faith.” A stockholder need not show a probability of success to meet the substantial-likelihood standard; the standard requires only a showing that “the claims have some merit.”

Plaintiff does not argue that the Committee Defendants acted in a self-interested manner or that they were beholden to an interested party. Rather, Plaintiff argues that the Committee Defendants failed to act in good faith when approving the TIDAL acquisition. Although a keen mind can rightly perceive a distinction between acting “not in good faith” and acting “in bad faith,” Delaware courts have used the phrases interchangeably in this context, and this decision follows suit.

Delaware courts have declined to offer an exhaustive definition of bad faith. “To engage in an effort to craft . . . ‘a definitive and categorical definition of the universe of acts that would constitute bad faith’ would be unwise.” The Delaware Supreme Court has described a non-exhaustive set of circumstances forming a failure to act in good faith:

A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient.

Pleading a failure to act in good faith requires the plaintiff to “plead particularized facts that demonstrate that the directors acted with scienter, i.e., that they had ‘actual or constructive knowledge’ that their conduct was legally improper.” That is, to allege a lack of good faith, a plaintiff must allege that the actor knew that he was acting “inconsistent with his fiduciary duties.” “Gross negligence, without more, is insufficient to get out from under an exculpated breach of the duty of care.”

Generally, this court is not in the business of second-guessing board decisions made by disinterested and independent directors. Of course, there are some business decisions that are so suspect that it is reasonably conceivable that the decision makers were not acting to advance the best interest of the corporation. Two cases relied on by the parties in briefing help delineate the boundaries of this principle—Disney, denying a motion to dismiss where the plaintiff adequately alleged that the board acted in bad faith, and McElrath, granting a motion to dismiss where the plaintiff failed to adequately allege that the board acted in bad faith.

In Disney, a stockholder sued Disney’s departing CEO, Eisner, and its board for breach of fiduciary duty in connection with the hiring and firing of Eisner’s longtime friend Ovitz as President. The narrative set out in the Disney complaint was quite stark. As alleged, Eisner “unilaterally” made the hiring decision. The board did not receive any presentations on the terms of the employment contract, did not ask questions about the proposed agreement, received only a summary of the employment agreement’s terms, approved the hire while the employment agreement was still a “work in progress,” did not engage in further review once it had authorized the hire, and did not retain any outside experts to consult on the agreement. Negotiation of the unresolved employment terms took place solely between Eisner, Ovitz, and their attorneys. The compensation committee followed up with meetings to receive updates on the negotiations but did not otherwise engage in the process. The final agreement differed vastly from the initial summary that the board had approved. And when Eisner terminated Ovitz a year later, the employment agreement allowed Ovitz to reap substantial exit benefits, which the board permitted without further investigation.

On these facts, then-Chancellor Chandler denied the defendants’ motion to dismiss for failure to plead demand futility, holding that the plaintiff had adequately pled that the directors failed to act in good faith. The well-pled allegations portrayed more than mere negligent or grossly negligent conduct, and instead suggested “that the defendant directors consciously and intentionally disregarded their responsibilities, adopting a ‘we don’t care about the risks’ attitude concerning a material corporate decision.” Put differently, the facts as alleged gave rise to the inference that the directors “knew that they were making material decisions without adequate information and without adequate deliberation, and that they simply did not care if the decisions caused the corporation and its stockholders to suffer injury or loss.” The Chancellor weighed the board’s “ostrich-like” approach and concluded that the plaintiff had adequately alleged that “the defendant directors’ conduct fell outside the protection of the business judgment rule,” and that conclusion was sufficient to render demand futile under the second prong of Aronson.

Distinguishable allegations resulted in a different outcome in McElrath. There, a stockholder challenged Uber’s acquisition of a self-driving car project from Google. Uber’s CEO, Travis Kalanick, negotiated the acquisition. Uber’s diligence materials included a report from a computer forensic investigation firm finding that some of the target’s employees had retained confidential information from Google following their departure. When the misuse of confidential information was later revealed, Uber suffered financially and reputationally. The plaintiff brought derivative claims against Kalanick and the directors who approved the transaction. To plead bad faith as to a majority of the board, the plaintiff constructed a narrative that the board was on notice that Kalanick might ignore intellectual property issues because Kalanick’s prior business had been sued for copyright violations, Uber had a practice of hiring employees from competitors to steal trade secrets, and the merger agreement contained an abnormal indemnification clause that prevented Uber from seeking indemnification from the target’s employees for non-compete and infringement claims.

The defendants moved to dismiss the complaint for failure to plead demand futility, and Vice Chancellor Glasscock granted the motion. The Delaware Supreme Court affirmed on appeal, identifying a number of factors that made it unreasonable to infer that Uber’s board acted in bad faith. The high court observed that “[b]y any reasonable measure, the Uber board of directors approved a flawed transaction,” but that did not give rise to a “real threat of personal liability” sufficient to disqualify a majority of the board for Rule 23.1 purposes. In reaching this conclusion, the court observed that the board did more than just rubberstamp the deal: they heard a presentation summarizing the transaction, reviewed the risk of litigation with Google, discussed due diligence, and asked questions. When the board asked questions about diligence and litigation risk, they received answers indicating that the risk was present, but not necessarily prevalent enough to kill the deal, and the board concluded that the diligence was “okay.” The high court rejected the appellant’s appeal to Disney by noting important distinctions—unlike the board in Disney, the Uber directors heard a presentation from the CEO on the transaction, met to consider the acquisition, and enlisted the assistance of outside counsel and an investigative firm to help with due diligence. The high court affirmed this court’s dismissal based on the plaintiff’s failure to show that the directors faced a substantial likelihood of liability.

Here, as in McErath, it is clear that the TIDAL acquisition was a “flawed” business decision “[b]y any reasonable measure.” The question is whether, as in Disney, Plaintiff adequately alleged that the majority of the board acted in bad faith when approving it.

Plaintiff’s counsel took an admirable stab at packaging the facts of this case into the mold of Disney. As Plaintiff tells it, Dorsey pulled some Eisner-level moves by pushing the deal forward singlehandedly, with the Transaction Committee playing an “ostrich-like” role. Plaintiff alleges that Dorsey caused Block to submit a letter of intent to purchase TIDAL before the Transaction Committee was even formed. The Transaction Committee then allowed Dorsey to handle negotiations. After discussing the opportunity for only thirty-five minutes during their first meeting in September, the Transaction Committee encouraged Dorsey to move forward. In advance of its second meeting in October, management provided a report that showed just how dire TIDAL’s market position looked. To be sure, the Transaction Committee asked many questions throughout the process, and Plaintiff concedes this much. Plaintiff argues, however, that the court should not credit the Transaction Committee for asking questions given the answers it received.

As Plaintiff sees it, the problem was not that the Transaction Committee failed to ask questions—it is that the answers did not seem to matter.

Before its October meeting, the Transaction Committee asked whether any other members of senior management supported the acquisition; in response, the committee learned that there were none, aside from Dorsey. The Transaction Committee asked whether the artist commitments, which formed the basis for at least half of management’s valuation of TIDAL, were legally enforceable; in response, the committee learned that Block would have “no recourse” if the artists decided to walk away. The Transaction Committee asked for near- and long-term plans for integrating TIDAL into Block’s business; in response, the committee learned that management had not created these plans and that this remained “one of the biggest risks.”

After the October meeting, the Transaction Committee went dark for three months while Dorsey negotiated the purchase price. Ultimately, without any further meetings, the Transaction Committee approved the acquisition by unanimous written consent.

Although the facts emphasized by Plaintiff do not generate tremendous confidence in the Transaction Committee’s process, they fall short of supporting an inference of bad faith. Effectively, Plaintiff asks the court to presume bad faith based on the merits of the deal alone. Plaintiff does not allege that the Transaction Committee lacked a business reason for wanting to acquire TIDAL—the presentation materials show management’s strategic goals for expanding Block into the music industry. Plaintiff does not attempt allege that any of the Committee Defendants were in any way beholden to Dorsey. Plaintiff acknowledge that the Committee Defendants did not sit idly by while Dorsey presented. They asked many appropriate questions before the October 20 meeting, and they asked many appropriate follow-up questions in advance of the next meeting on January 22. The Transaction Committee were presented with over twenty single-spaced slides providing management’s detailed answers to each of these questions. Over the course of negotiations, and even inexplicably after the deal was publicly announced, the purchase price dropped considerably.

On these facts, the Transaction Committee’s actions more closely resemble those in McElrath than Disney. Plaintiff has alleged sufficient facts to make a reasonable person question the business wisdom of the TIDAL acquisition, but Plaintiff has failed to plead that the Committee Defendants acted in bad faith and thus faced a substantial likelihood of liability for that decision.

Plaintiff’s allegations as to the remaining six non-Committee Defendant directors are even more attenuated. Plaintiff’s only allegations as to those defendants are that they failed to meaningfully supervise the Transaction Committee’s process. According to Plaintiff, the rest of the Board should have intervened to stop the TIDAL acquisition. Because Plaintiff has not adequately alleged that the Transaction Committee’s approval of the TIDAL acquisition rose to the level of bad faith, it is difficult to imagine how the Board’s lack of “supervision” of that process did so. Plaintiff’s allegations as to the remaining directors fail.

III. CONCLUSION

Ultimately, the demand requirement is a manifestation of the business judgment rule, which exists in part to “free fiduciaries making risky business decisions in good faith from the worry that if those decisions do not pan out in the manner they had hoped, they will put their personal net worths at risk.” In this case, the demand requirement operates as intended. Because Plaintiff failed to adequately allege with particularity facts giving rise to a reasonable doubt that a majority of the Board was disinterested or lacked independence with respect to the TIDAL acquisition, Plaintiff failed to plead that demand was futile. Defendants’ motion to dismiss pursuant to Rule 23.1 is granted.

5.1.3 Demand Hypotheticals 5.1.3 Demand Hypotheticals

The demand futility test can be confusing (even though it is ultimately very simple!). Let’s practice.

SUTOCS Inc. (“SUTOCS”) is a Delaware corporation with nine board members. In all the hypotheticals, shareholder Merrick files a derivative action against SUTOCS as nominal defendant and the respective principal defendants mentioned below. Merrick has not made a prior demand on the board. In each hypothetical, the question is if demand is excused as futile.

Merrick names as principal defendant X Corporation (“X”), alleging a damages claim.
Merrick names as principal defendants three former directors of SUTOCS, alleging a damages claim.
Merrick names as principal defendants the nine current directors of SUTOCS, alleging “breach of fiduciary duty.”
Merrick names as principal defendants the nine current directors of SUTOCS, alleging they paid themselves vacations, excessive salaries, etc. from SUTOCS’s accounts; Merrick lists the vacations, their costs, and the salaries, as well as comparison salaries at other firms and minutes from the SUTOCS board meetings approving these expenses.
Merrick names as principal defendants the nine current directors of SUTOCS, alleging that they approved a $30 billion acquisition agreement without reading it, without involving lawyers, bankers, or other advisors in the process, and while being very drunk on a beach; Merrick also alleges that a standard valuation method suggests SUTOCS should have paid $5 billion less in the deal.
Same as 4., but since the board meetings and payments in question, five of the nine directors have been replaced by new directors who did not participate in the meetings and did not receive any of the money.
Same as 6., but the five new board members are employees of another corporation owned by some of the nine principal defendants.

5.2 Rules Applicable to All Shareholder Litigation 5.2 Rules Applicable to All Shareholder Litigation

5.2.1 Indemnification and Insurance 5.2.1 Indemnification and Insurance

Disney made it quite clear that the risk of liability for unconflicted directors is now modest at best even under the default rules: the business judgment rule provides robust protection to directors (and arguably officers). If the corporation’s charter has a 102(b)(7) waiver, as most do, the risk of liability for directors (but not officers) is even less. Finally derivative suits face the formidable hurdle of the demand requirement and perhaps a special litigation committee.

Nevertheless, directors and officers still face residual risk, in particular from litigation costs. Moreover, directors and officers may be the target of third-party litigation in relation to their corporate office: For example, the directors might be the target of an SEC enforcement action or an employee lawsuit as a result of their board service, whether or not such actions have a legally sound basis. For this reason, directors and officers should and do require that corporations indemnify and insure them extensively, even in advance of the final disposition of proceedings, which can take years (and generate hefty expenses in the interim). Please (re-)read Article IV of Apple's charter, Article X of Apple's bylaws, and the law firm advice to prospective directors at perma.cc/4QGU-M4FL. Under DGCL 145, corporations are allowed (subsections a-b, e-f) and sometimes required (subsection c) to provide such indemnification and insurance. As a result, outside directors virtually never have to pay anything out of their own pockets in corporate lawsuits, see Bernard Black, Brian Cheffins, & Michael Klausner, Outside Director Liability, 58 Stan. L. Rev. 1055 (2006).

Questions:

1. Which liabilities and expenses are indemnifiable under DGCL 145? Which are insurable?
2. What does your answer to the preceding question imply for directors' and officers' incentives to settle a derivative action?
3. Why do directors and officers insist on insurance, i.e., why are they still worried in spite of the business judgment rule, 102(b)(7) waivers, and generous indemnification promises?

5.2.2 Americas Mining Corp. v. Theriault (Del. 2012) (Attorney's Fees) 5.2.2 Americas Mining Corp. v. Theriault (Del. 2012) (Attorney's Fees)

To generate a substantial amount of shareholder litigation, merely allowing shareholders suits, direct or derivative, is not sufficient. Somebody needs to have an incentive to bring the suit. If shareholder-plaintiffs only recovered their pro rata share of the recovery (indirectly in the case of a derivative suit), incentives to bring suit would be very low and, in light of substantial litigation costs, usually insufficient. Litigation would be hamstrung by the same collective action problem as proxy fights. Under the common fund doctrine, however, U.S. courts award a substantial part of the recovery to the plaintiff or, in the standard case, to the plaintiff lawyer. As Americas Mining shows, that award can be very substantial indeed. Note that we excerpt only the passages relevant to the attorney fee award. The case in the court below was In re Southern Peru (Del. Ch. 2011).

The litigation incentives generated by such awards strike some as excessive. For a while, virtually every M&A deal attracted shareholder litigation, albeit mostly with much lower or no recovery. Corporations tried various tactics to limit the amount of litigation they face, prompting recent amendments of the DGCL (sections 102(f) and 115 – read!).

Questions:

1. How does the court determine the right amount of the fee award? What criteria does it use, and what purposes does it aim to achieve? Are the criteria well calibrated to the purposes?
2. Who is opposing the fee award, and why?
3. Are the damage and fee awards sufficient to deter fiduciary duty violations similar to those at issue in this case?

Delaware Supreme Court

51 A.3d 1213

Nos. 29, 2012, 30, 2012

2012-08-27

51 A.3d 1213 (2012)

AMERICAS MINING CORPORATION, et al., Defendants Below, Appellants,
v.
Michael THERIAULT, as Trustee for the Theriault Trust, Plaintiff Below, Appellee.
Southern Copper Corporation, formerly known as Southern Peru Copper Corporation, Nominal Defendant Below, Appellant,
v.
Michael Theriault, as Trustee for the Theriault Trust, Plaintiff Below, Appellee.

Nos. 29, 2012, 30, 2012.

Supreme Court of Delaware.

Submitted: June 7, 2012.Decided: August 27, 2012.Reargument Denied: September 21, 2012.

[1218] S. Mark Hurd, Esquire and Kevin M. Coen, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and Bruce D. Angiolillo, Esquire (argued), Jonathan K. Youngwood, Esquire, Craig S. Waldman, Esquire, and Daniel J. Stujenske, Esquire, Simpson, Thacher & Bartlett LLP, New York, New York, for appellants, Americas Mining Corporation, Germán Larrea Mota-Velasco, Genaro Larrea Mota-Velasco, Oscar Gonzalez Rocha, Emilio Carrillo Gamboa, Jaime Fernando Collazo Gonzalez, Xavier Garcia de Quevedo Topete, Armando Ortega Gómez, and Juan Rebolledo Gout.

Stephen E. Jenkins, Esquire (argued), Richard L. Renck, Esquire, Andrew D. Cordo, Esquire and F. Troupe Mickler, IV, Esquire, Ashby & Geddes, Wilmington, Delaware, for appellant, Nominal Defendant Southern Copper Corporation, formerly known as Southern Peru Copper Corporation.

Ronald A. Brown, Jr., Esquire (argued) and Marcus E. Montejo, Esquire, Prickett, Jones & Elliott, P.A., Wilmington, Delaware, and Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania, for appellee.

Before STEELE, Chief Justice, HOLLAND, BERGER and RIDGELY, Justices and VAUGHN, President Judge,^[1] constituting the Court en Banc.

HOLLAND, Justice, for the majority:

This is an appeal from a post-trial decision and final judgment of the Court of Chancery awarding more than $2 billion in damages and more than $304 million in attorneys' fees. The Court of Chancery held that the defendants-appellants, Americas Mining Corporation ("AMC"), the subsidiary of Southern Copper Corporation's ("Southern Peru") controlling shareholder, and affiliate directors of Southern Peru (collectively, the "Defendants"), breached their fiduciary duty of loyalty to Southern Peru and its minority stockholders by causing Southern Peru to acquire the controller's 99.15% interest in a Mexican mining company, Minera México, S.A. de C.V. ("Minera"), for much more than it was worth, i.e., at an unfair price.

The Plaintiff challenged the transaction derivatively on behalf of Southern Peru. The Court of Chancery found the trial evidence established that the controlling shareholder, Grupo México, S.A.B. de C.V. ("Grupo Mexico"), through AMC, "extracted a deal that was far better than market" from Southern Peru due to the ineffective operation of a special committee (the "Special Committee"). To remedy the Defendants' breaches of loyalty, the Court of Chancery awarded the difference between the value Southern Peru paid for Minera ($3.7 billion) and the amount the Court of Chancery determined Minera was worth ($2.4 billion). The Court of Chancery awarded damages in the amount of $1.347 billion plus pre- and post-judgment interest, for a total judgment of $2.0316 billion. The Court of Chancery also awarded the Plaintiff's counsel attorneys' fees and expenses in the amount of 15% of the total judgment, which amounts to more than $304 million.

Issues on Appeal

The Defendants have raised five issues on appeal. First, they argue that the Court of Chancery impermissibly denied the Defendants the opportunity to present a witness from Goldman, Sachs & Co. ("Goldman") at trial to explain its valuation process, on the grounds that the witness constituted an "unfair surprise." Second, they contend that the Court of Chancery committed reversible error by failing to [1219] determine which party bore the burden of proof before trial. They further claim the Court of Chancery erred by ultimately allocating the burden to the Defendants, because, they submit, the Special Committee was independent, well-functioning, and did not rely on the controlling shareholder for the information that formed the basis for its recommendation. Third, they argue that the Court of Chancery's determination about the "fair" price for the transaction was arbitrary and capricious. Fourth, they assert that the Court of Chancery's award of damages is not supported by evidence in the record, but rather by impermissible speculation and conjecture. Finally, the Defendants' allege that the Court of Chancery's award of attorneys' fees of more than $304 million is an abuse of discretion. Southern Peru also appeals from the award of attorneys' fees to the Plaintiff's counsel.

We have determined that all of the Defendants' arguments are without merit. Therefore, the judgment of the Court of Chancery is affirmed.

FACTUAL BACKGROUND^[2]

The controlling stockholder in this case is Grupo México, S.A.B. de C.V. The NYSE-listed mining company is Southern Peru Copper Corporation.^[3] The Mexican mining company is Minera México, S.A. de C.V.^[4]

In February 2004, Grupo Mexico proposed that Southern Peru buy its 99.15% stake in Minera. At the time, Grupo Mexico owned 54.17% of Southern Peru's outstanding capital stock and could exercise 63.08% of the voting power of Southern Peru, making it Southern Peru's majority stockholder.

Grupo Mexico initially proposed that Southern Peru purchase its equity interest in Minera with 72.3 million shares of newly-issued Southern Peru stock. This "indicative" number assumed that Minera's equity was worth $3.05 billion, because that is what 72.3 million shares of Southern Peru stock were worth then in cash. By stark contrast with Southern Peru, Minera was almost wholly owned by Grupo Mexico and therefore had no market-tested value.

Because of Grupo Mexico's self-interest in the merger proposal, Southern Peru formed a "Special Committee" of disinterested directors to "evaluate" the transaction with Grupo Mexico. The Special Committee spent eight months in an awkward back and forth with Grupo Mexico over the terms of the deal before approving Southern Peru's acquisition of 99.15% of Minera's stock in exchange for 67.2 million newly-issued shares of Southern Peru stock (the "Merger") on October 21, 2004. That same day, Southern Peru's board of directors (the "Board") unanimously approved the Merger and Southern Peru and Grupo Mexico entered into a definitive agreement (the "Merger Agreement"). On October 21, 2004, the market value of 67.2 million shares of Southern Peru stock was $3.1 billion. When the Merger closed on April 1, 2005, the value [1220] of 67.2 million shares of Southern Peru had grown to $3.75 billion.

This derivative suit was then brought against the Grupo Mexico subsidiary that owned Minera, the Grupo Mexico-affiliated directors of Southern Peru, and the members of the Special Committee, alleging that the Merger was entirely unfair to Southern Peru and its minority stockholders.

The crux of the Plaintiff's argument is that Grupo Mexico received something demonstrably worth more than $3 billion (67.2 million shares of Southern Peru stock) in exchange for something that was not worth nearly that much (99.15% of Minera).^[5] The Plaintiff points to the fact that Goldman, which served as the Special Committee's financial advisor, never derived a value for Minera that justified paying Grupo Mexico's asking price, but instead relied on a "relative" valuation analysis that involved comparing the discounted cash flow ("DCF") values of Southern Peru and Minera, and a contribution analysis that improperly applied Southern Peru's own market EBITDA multiple (and even higher multiples) to Minera's EBITDA projections, to determine an appropriate exchange ratio to use in the Merger. The Plaintiff claims that, because the Special Committee and Goldman abandoned the company's market price as a measure of the true value of the give, Southern Peru substantially overpaid in the Merger.

The Defendants remaining in the case are Grupo Mexico and its affiliate directors who were on the Southern Peru Board at the time of the Merger.^[6] These Defendants assert that Southern Peru and Minera are similar companies and were properly valued on a relative basis. In other words, the defendants argue that the appropriate way to determine the price to be paid by Southern Peru in the Merger was to compare both companies' values using the same set of assumptions and methodologies, rather than comparing Southern Peru's market capitalization to Minera's DCF value. The Defendants do not dispute that shares of Southern Peru stock could have been sold for their market price at the time of the Merger, but they contend that Southern Peru's market price did not reflect the fundamental value of Southern Peru and thus could not appropriately be compared to the DCF value of Minera.

After this brief overview of the basic events and the parties' core arguments, the Court of Chancery provided the following more detailed recitation of the facts as it found them after trial.

The Key Players

Southern Peru operates mining, smelting, and refining facilities in Peru, producing copper and molybdenum as well as silver and small amounts of other metals. Before the Merger, Southern Peru had two classes of stock: common shares that were traded on the New York Stock Exchange; and "Founders Shares" that were owned by Grupo Mexico, Cerro Trading Company, Inc., and Phelps Dodge Corporation (the "Founding Stockholders"). Each Founders Share had five votes per share versus one vote per share for ordinary common stock. Grupo Mexico owned 43.3 million Founders Shares, which translated [1221] to 54.17% of Southern Peru's outstanding stock and 63.08% of the voting power.

Southern Peru's certificate of incorporation and a stockholders' agreement also gave Grupo Mexico the right to nominate a majority of the Southern Peru Board. The Grupo Mexico-affiliated directors who are defendants in this case held seven of the thirteen Board seats at the time of the Merger. Cerro owned 11.4 million Founders Shares (14.2% of the outstanding common stock) and Phelps Dodge owned 11.2 million Founders Shares (13.95% of the outstanding common stock). Among them, therefore, Grupo Mexico, Cerro, and Phelps Dodge owned over 82% of Southern Peru.

Grupo Mexico is a Mexican holding company listed on the Mexican stock exchange. Grupo Mexico is controlled by the Larrea family, and at the time of the Merger defendant Germán Larrea was the Chairman and CEO of Grupo Mexico, as well as the Chairman and CEO of Southern Peru. Before the Merger, Grupo Mexico owned 99.15% of Minera's stock and thus essentially was Minera's sole owner. Minera is a company engaged in the mining and processing of copper, molybdenum, zinc, silver, gold, and lead through its Mexico-based mines. At the time of the Merger, Minera was emerging from — if not still mired in — a period of financial difficulties, and its ability to exploit its assets had been compromised by these financial constraints. By contrast, Southern Peru was in good financial condition and virtually debt-free.

Grupo Mexico Proposes That Southern Peru Acquire Minera

In 2003, Grupo Mexico began considering combining its Peruvian mining interests with its Mexican mining interests. In September 2003, Grupo Mexico engaged UBS Investment Bank to provide advice with respect to a potential strategic transaction involving Southern Peru and Minera.

Grupo Mexico and UBS made a formal presentation to Southern Peru's Board on February 3, 2004, proposing that Southern Peru acquire Grupo Mexico's interest in Minera from AMC in exchange for newly-issued shares of Southern Peru stock. In that presentation, Grupo Mexico characterized the transaction as "[Southern Peru] to acquire Minera [] from AMC in a stock for stock deal financed through the issuance of common shares; initial proposal to issue 72.3 million shares." A footnote to that presentation explained that the 72.3 million shares was "an indicative number" of Southern Peru shares to be issued, assuming an equity value of Minera of $3.05 billion and a Southern Peru share price of $42.20 as of January 29, 2004.

In other words, the consideration of 72.3 million shares was indicative in the sense that Grupo Mexico wanted $3.05 billion in dollar value of Southern Peru stock for its stake in Minera, and the number of shares that Southern Peru would have to issue in exchange for Minera would be determined based on Southern Peru's market price. As a result of the proposed merger, Minera would become a virtually wholly-owned subsidiary of Southern Peru. The proposal also contemplated the conversion of all Founders Shares into a single class of common shares.

Southern Peru Forms A Special Committee

In response to Grupo Mexico's presentation, the Board met on February 12, 2004 and created a Special Committee to evaluate the proposal. The resolution creating the Special Committee provided that the "duty and sole purpose" of the Special Committee was "to evaluate the [Merger] [1222] in such manner as the Special Committee deems to be desirable and in the best interests of the stockholders of [Southern Peru]," and authorized the Special Committee to retain legal and financial advisors at Southern Peru's expense on such terms as the Special Committee deemed appropriate. The resolution did not give the Special Committee express power to negotiate, nor did it authorize the Special Committee to explore other strategic alternatives.

The Special Committee's makeup as it was finally settled on March 12, 2004 was as follows:

• Harold S. Handelsman: Handelsman graduated from Columbia Law School and worked at Wachtell, Lipton, Rosen & Katz as an M & A lawyer before becoming an attorney for the Pritzker family interests in 1978. The Pritzker family is a wealthy family based in Chicago that owns, through trusts, a myriad of businesses. Handelsman was appointed to the Board in 2002 by Cerro, which was one of those Pritzker-owned businesses.

• Luis Miguel Palomino Bonilla: Palomino has a Ph.D in finance from the Wharton School at the University of Pennsylvania and worked as an economist, analyst and consultant for various banks and financial institutions. Palomino was nominated to the Board by Grupo Mexico upon the recommendation of certain Peruvian pension funds that held a large portion of Southern Peru's publicly traded stock.

• Gilberto Perezalonso Cifuentes: Perezalonso has both a law degree and an MBA and has managed multi-billion dollar companies such as Grupo Televisa and AeroMexico Airlines. Perezalonso was nominated to the Board by Grupo Mexico.

• Carlos Ruiz Sacristán: Ruiz, who served as the Special Committee's Chairman, worked as a Mexican government official for 25 years before co-founding an investment bank, where he advises on M & A and financing transactions. Ruiz was nominated to the Board by Grupo Mexico.

The Special Committee Hires Advisors And Seeks A Definitive Proposal From Grupo Mexico

The Special Committee began its work by hiring U.S. counsel and a financial advisor. After considering various options, the Special Committee chose Latham & Watkins LLP and Goldman. The Special Committee also hired a specialized mining consultant to help Goldman with certain technical aspects of mining valuation. Goldman suggested consultants that the Special Committee might hire to aid in the process; after considering these options, the Special Committee retained Anderson & Schwab ("A & S").

After hiring its advisors, the Special Committee set out to acquire a "proper" term sheet from Grupo Mexico. The Special Committee did not view the most recent term sheet that Grupo Mexico had sent on March 25, 2004 as containing a price term that would allow the Special Committee to properly evaluate the proposal. For some reason the Special Committee did not get the rather clear message that Grupo Mexico thought Minera was worth $3.05 billion.

Thus, in response to that term sheet, on April 2, 2004, Ruiz sent a letter to Grupo Mexico on behalf of the Special Committee in which he asked for clarification about, among other things, the pricing of the proposed transaction. On May 7, 2004, Grupo Mexico sent to the Special Committee [1223] what the Special Committee considered to be the first "proper" term sheet, making even more potent its ask.

The May 7 Term Sheet

Grupo Mexico's May 7 term sheet contained more specific details about the proposed consideration to be paid in the Merger. It echoed the original proposal, but increased Grupo Mexico's ask from $3.05 billion worth of Southern Peru stock to $3.147 billion. Specifically, the term sheet provided that:

The proposed value of Minera [] is US$4,3 billion, comprised of an equity value of US$3,147 million [sic] and US$1,153 million [sic] of net debt as of April 2004. The number of [Southern Peru] shares to be issued in respect to the acquisition of Minera [] would be calculated by dividing 98.84% of the equity value of Minera [] by the 20-day average closing share price of [Southern Peru] beginning 5 days prior to closing of the [Merger].^[7]

In other words, Grupo Mexico wanted $3.147 billion in market-tested Southern Peru stock in exchange for its stake in Minera. The structure of the proposal, like the previous Grupo Mexico ask, shows that Grupo Mexico was focused on the dollar value of the stock it would receive.

Throughout May 2004, the Special Committee's advisors conducted due diligence to aid their analysis of Grupo Mexico's proposal. As part of this process, A & S visited Minera's mines and adjusted the financial projections of Minera management (i.e., of Grupo Mexico) based on the outcome of their due diligence.

Goldman Begins To Analyze Grupo Mexico's Proposal

On June 11, 2004, Goldman made its first presentation to the Special Committee addressing the May 7 term sheet. Although Goldman noted that due diligence was still ongoing, it had already done a great deal of work and was able to provide preliminary valuation analyses of the standalone equity value of Minera, including a DCF analysis, a contribution analysis, and a look-through analysis.

Goldman performed a DCF analysis of Minera based on long-term copper prices ranging from $0.80 to $1.00 per pound and discount rates ranging from 7.5% to 9.5%, utilizing both unadjusted Minera management projections and Minera management projections as adjusted by A & S. The only way that Goldman could derive a value for Minera close to Grupo Mexico's asking price was by applying its most aggressive assumptions (a modest 7.5% discount rate and its high-end $1.00/lb long-term copper price) to the unadjusted Minera management projections, which yielded an equity value for Minera of $3.05 billion. By applying the same aggressive assumptions to the projections as adjusted by A & S, Goldman's DCF analysis yielded a lower equity value for Minera of $2.41 billion. Goldman's mid-range assumptions (an 8.5% discount rate and $0.90/lb long-term copper price) only generated a $1.7 billion equity value for Minera when applied to the A & S-adjusted projections. That is, the mid-range of the Goldman analysis generated a value for Minera (the "get") a full $1.4 billion less than Grupo Mexico's ask for the give.

It made sense for Goldman to use the $0.90 per pound long term copper price as a mid-range assumption, because this price [1224] was being used at the time by both Southern Peru and Minera for purposes of internal planning. The median long-term copper price forecast based on Wall Street research at the time of the Merger was also $0.90 per pound.

Goldman's contribution analysis applied Southern Peru's market-based sales, EBITDA, and copper sales multiples to Minera. This analysis yielded an equity value for Minera ranging only between $1.1 and $1.7 billion. Goldman's look-through analysis, which was a sum-of-the-parts analysis of Grupo Mexico's market capitalization, generated a maximum equity value for Minera of $1.3 billion and a minimum equity value of only $227 million.

Goldman summed up the import of these various analyses in an "Illustrative Give/Get Analysis," which made patent the stark disparity between Grupo Mexico's asking price and Goldman's valuation of Minera: Southern Peru would "give" stock with a market price of $3.1 billion to Grupo Mexico and would "get" in return an asset worth no more than $1.7 billion.

The important assumption reflected in Goldman's June 11 presentation was that a bloc of shares of Southern Peru could yield a cash value equal to Southern Peru's actual stock market price and was thus worth its market value was emphasized by the Court of Chancery. At trial, the Defendants disclaimed any reliance upon a claim that Southern Peru's stock market price was not a reliable indication of the cash value that a very large bloc of shares — such as the 67.2 million paid to Grupo Mexico — could yield in the market. Thus, the price of the "give" was always easy to discern. The question thus becomes what was the value of the "get." Unlike Southern Peru, Minera's value was not the subject of a regular market test. Minera shares were not publicly traded and thus the company was embedded in the overall value of Grupo Mexico.

The June 11 presentation clearly demonstrates that Goldman, in its evaluation of the May 7 term sheet, could not get the get anywhere near the give. Notably, that presentation marked the first and last time that a give-get analysis appeared in Goldman's presentations to the Special Committee.

The Court of Chancery described what happened next as curious. The Special Committee began to devalue the "give" in order to make the "get" look closer in value. The DCF analysis of the value of Minera that Goldman presented initially caused concern. As Handelsman stated at trial, "when [the Special Committee] thought that the value of Southern Peru was its market value and the value of Minera [] was its discounted cash flow value ... those were very different numbers."

But, the Special Committee's view changed when Goldman presented it with a DCF analysis of the value of Southern Peru on June 23, 2004. In this June 23 presentation, Goldman provided the Special Committee with a preliminary DCF analysis for Southern Peru analogous to the one that it had provided for Minera in the June 11 presentation. But, the discount rates that Goldman applied to Southern Peru's cash flows ranged from 8% to 10% instead of 7.5% to 9.5%. Based on Southern Peru management's projections, the DCF value generated for Southern Peru using mid-range assumptions (a 9% discount rate and $0.90/lb long-term copper price) was $2.06 billion. This was about $1.1 billion shy of Southern Peru's market capitalization as of June 21, 2004 ($3.19 billion). Those values "comforted" the [1225] Special Committee.^[8]

The Court of Chancery found that "comfort" was an odd word for the Special Committee to use in this context. What Goldman was basically telling the Special Committee was that Southern Peru was being overvalued by the stock market. That is, Goldman told the Special Committee that even though Southern Peru's stock was worth an obtainable amount in cash, it really was not worth that much in fundamental terms. Thus, although Southern Peru had an actual cash value of $3.19 billion, its "real," "intrinsic," or "fundamental" value was only $2.06 billion, and giving $2.06 billion in fundamental value for $1.7 billion in fundamental value was something more reasonable to consider.

The Court of Chancery concluded that the more logical reaction of someone not in the confined mindset of directors of a controlled company may have been that it was a good time to capitalize on the market multiple the company was getting and monetize the asset. The Court of Chancery opined that a third party in the Special Committee's position might have sold at the top of the market, or returned cash to the Southern Peru stockholders by declaring a special dividend. For example, if it made long-term strategic sense for Grupo Mexico to consolidate Southern Peru and Minera, there was a logical alternative for the Special Committee: ask Grupo Mexico to make a premium to market offer for Southern Peru. Let Grupo Mexico be the buyer, not the seller.

In other words, the Court of Chancery found that by acting like a third-party negotiator with its own money at stake and with the full range of options, the Special Committee would have put Grupo Mexico back on its heels. Doing so would have been consistent with the financial advice it was getting and seemed to accept as correct. The Special Committee could have also looked to use its market-proven stock to buy a company at a good price (a lower multiple to earnings than Southern Peru's) and then have its value rolled into Southern Peru's higher market multiple to earnings. That could have included buying Minera at a price equal to its fundamental value using Southern Peru's market-proven currency.

The Court of Chancery was chagrined that instead of doing any of these things, the Special Committee was "comforted" by the fact that they could devalue that currency and justify paying more for Minera than they originally thought they should.

Special Committee Moves Toward Relative Valuation

After the June 23, 2004 presentation, the Special Committee and Goldman began to embrace the idea that the companies should be valued on a relative basis. In a July 8, 2004 presentation to the Special Committee, Goldman included both a revised standalone DCF analysis of Minera and a "Relative Discounted Cash Flow Analysis" in the form of matrices presenting the "indicative number" of Southern Peru shares that should be issued to acquire Minera based on various assumptions. The relative DCF analysis generated a vast range of Southern Peru shares to be issued in the Merger of 28.9 million to 71.3 million. Based on Southern Peru's July 8, 2004 market value of $40.30 per share, 28.9 million shares of Southern Peru stock had a market value of $1.16 billion, and 71.3 million shares were worth $2.87 [1226] billion. In other words, even the highest equity value yielded for Minera by this analysis was short of Grupo Mexico's actual cash value asking price.

The revised standalone DCF analysis applied the same discount rate and long-term copper price assumptions that Goldman had used in its June 11 presentation to updated projections. This time, by applying a 7.5% discount rate and $1.00 per pound long-term copper price to Minera management's projections, Goldman was only able to yield an equity value of $2.8 billion for Minera. Applying the same aggressive assumptions to the projections as adjusted by A & S generated a standalone equity value for Minera of only $2.085 billion. Applying mid-range assumptions (a discount rate of 8.5% and $0.90/lb long-term copper price) to the A & S-adjusted projections yielded an equity value for Minera of only $1.358 billion.

The Special Committee Makes A Counterproposal Suggests A Fixed-Exchange Ratio

After Goldman's July 8 presentation, the Special Committee made a counterproposal to Grupo Mexico. The Court of Chancery noted it was "oddly" not mentioned in Southern Peru's proxy statement describing the Merger (the "Proxy Statement"). In this counterproposal, the Special Committee offered that Southern Peru would acquire Minera by issuing 52 million shares of Southern Peru stock with a then-current market value of $2.095 billion. The Special Committee also proposed implementation of a fixed, rather than a floating, exchange ratio that would set the number of Southern Peru shares issued in the Merger.

From the inception of the Merger, Grupo Mexico had contemplated that the dollar value of the price to be paid by Southern Peru would be fixed (at a number that was always north of $3 billion), while the number of Southern Peru shares to be issued as consideration would float up or down based on Southern Peru's trading price around the time of closing. But, the Special Committee was uncomfortable with having to issue a variable amount of shares in the Merger. Handelsman testified that, in its evaluation of Grupo Mexico's May 7 term sheet, "it was the consensus of the [Special Committee] that a floating exchange rate was a nonstarter" because "no one could predict the number of shares that [Southern Peru] would have to issue in order to come up with the consideration requested."

The Special Committee wanted a fixed exchange ratio, which would set the number of shares that Southern Peru would issue in the Merger at the time of signing. The dollar value of the Merger consideration at the time of closing would vary with the fluctuations of Southern Peru's market price. According to the testimony of the Special Committee members, their reasoning was that both Southern Peru's stock and the copper market had been historically volatile, and a fixed exchange ratio would protect Southern Peru's stockholders from a situation in which Southern Peru's stock price went down and Southern Peru would be forced to issue a greater number of shares for Minera in order to meet a fixed dollar value. The Court of Chancery found that position was hard to reconcile with the Special Committee and Southern Peru's purported bullishness about the copper market in 2004.

Grupo Mexico Sticks To Its Demand

In late July or early August, Grupo Mexico responded to the Special Committee's counterproposal by suggesting that Southern Peru should issue in excess of 80 million shares of common stock to purchase Minera. It is not clear on the record [1227] exactly when Grupo Mexico asked for 80 million shares, but given Southern Peru's trading history at that time, the market value of that consideration would have been close to $3.1 billion, basically the same place where Grupo Mexico had started. The Special Committee viewed Grupo Mexico's ask as too high, which is not surprising given that the parties were apparently a full billion dollars in value apart, and negotiations almost broke down.

But, on August 21, 2004, after what is described as "an extraordinary effort" in Southern Peru's Proxy Statement, Grupo Mexico proposed a new asking price of 67 million shares. On August 20, 2004, Southern Peru was trading at $41.20 per share, so 67 million shares were worth about $2.76 billion on the market, a drop in Grupo Mexico's ask. Grupo Mexico's new offer brought the Special Committee back to the negotiating table.

After receiving two term sheets from Grupo Mexico that reflected the 67 million share asking price, the second of which was received on September 8, 2004, when 67 million shares had risen to be worth $3.06 billion on the market, Goldman made another presentation to the Special Committee on September 15, 2004. In addition to updated relative DCF analyses of Southern Peru and Minera (presented only in terms of the number of shares of Southern Peru stock to be issued in the Merger), this presentation contained a "Multiple Approach at Different EBITDA Scenarios," which was essentially a comparison of Southern Peru and Minera's market-based equity values, as derived from multiples of Southern Peru's 2004 and 2005 estimated (or "E") EBITDA.

Goldman also presented these analyses in terms of the number of Southern Peru shares to be issued to Grupo Mexico, rather than generating standalone values for Minera. The range of shares to be issued at the 2004E EBITDA multiple (5.0x) was 44 to 54 million; at the 2005E multiple (6.3x) Goldman's analyses yielded a range of 61 to 72 million shares of Southern Peru stock. Based on Southern Peru's $45.34 share price as of September 15, 2004, 61 to 72 million shares had a cash value of $2.765 billion to $3.26 billion.

The Special Committee sent a new proposed term sheet to Grupo Mexico on September 23, 2004. That term sheet provided for a fixed purchase price of 64 million shares of Southern Peru (translating to a $2.95 billion market value based on Southern Peru's then-current closing price). The Special Committee's proposal contained two terms that would protect the minority stockholders of Southern Peru: (1) a 20% collar around the purchase price, which gave both the Special Committee and Grupo Mexico the right to walk away from the Merger if Southern Peru's stock price went outside of the collar before the stockholder vote; and (2) a voting provision requiring that a majority of the minority stockholders of Southern Peru vote in favor of the Merger. Additionally, the proposal called for Minera's net debt, which Southern Peru was going to absorb in the Merger, to be capped at $1.105 billion at closing, and contained various corporate governance provisions.

The Special Committee's Proposed Terms Rejected But The Parties Work Out A Deal

On September 30, 2004, Grupo Mexico sent a counterproposal to the Special Committee, in which Grupo Mexico rejected the Special Committee's offer of 64 million shares and held firm to its demand for 67 million shares. Grupo Mexico's counterproposal also rejected the collar and the majority of the minority vote provision, proposing instead that the Merger be conditioned [1228] on the vote of two-thirds of the outstanding stock. Grupo Mexico noted that conditioning the Merger on a two-thirds shareholder vote obviated the need for the walk-away right requested by the Special Committee, because Grupo Mexico would be prevented from approving the Merger unilaterally in the event the stock price was materially higher at the time of the stockholder vote than at the time of Board approval. Grupo Mexico did accept the Special Committee's proposed $1.05 billion debt cap at closing. The Court of Chancery found that was not much of a concession in light of the fact that Minera was already contractually obligated to pay down its debt and was in the process of doing so.

After the Special Committee received Grupo Mexico's September 30 counterproposal, the parties reached agreement on certain corporate governance provisions to be included in the Merger Agreement, some of which were originally suggested by Grupo Mexico and some of which were first suggested by the Special Committee. Without saying these provisions were of no benefit at all to Southern Peru and its outside investors, the Court of Chancery did say that they did not factor more importantly in its decision because they do not provide any benefit above the protections of default law that were economically meaningful enough to close the material dollar value gap that existed.

On October 5, 2004, members of the Special Committee met with Grupo Mexico to iron out a final deal. At that meeting, the Special Committee agreed to pay 67 million shares, dropped their demand for the collar, and acceded to most of Grupo Mexico's demands. The Special Committee justified paying a higher price through what the Court of Chancery described as a series of economic contortions. The Special Committee was able to "bridge the gap" between the 64 million and the 67 million figures by decreasing Minera's debt cap by another $105 million, and by getting Grupo Mexico to cause Southern Peru to issue a special dividend of $100 million, which had the effect of decreasing the value of Southern Peru's stock. According to Special Committee member Handelsman, these "bells and whistles" made it so that "the value of what was being ... acquired in the merger went up, and the value of the specie that was being used in the merger went down...," giving the Special Committee reason to accept a higher Merger price.

The closing share price of Southern Peru was $53.16 on October 5, 2004, so a purchase price of 67 million shares had a market value of $3.56 billion, which was higher than the dollar value requested by Grupo Mexico in its February 2004 proposal or its original May 7 term sheet.

At that point, the main unresolved issue was the stockholder vote that would be required to approve the Merger. After further negotiations, on October 8, 2004, the Special Committee gave up on its proposed majority of the minority vote provision and agreed to Grupo Mexico's suggestion that the Merger require only the approval of two-thirds of the outstanding common stock of Southern Peru. Given the size of the holdings of Cerro and Phelps Dodge, Grupo Mexico could achieve a two-thirds vote if either Cerro or Phelps Dodge voted in favor of the Merger.

Multi-Faceted Dimensions Of Controlling Power: Large Stockholders Who Want To Get Out Support A Strategic, Long-Term Acquisition As A Prelude To Their Own Exit As Stockholders

One of the members of the Special Committee, Handelsman, represented a large [1229] Founding Stockholder, Cerro. The Court of Chancery noted that this might be seen in some ways to have ideally positioned Handelsman to be a very aggressive negotiator. But Handelsman had a problem to deal with, which did not involve Cerro having any self-dealing interest in the sense that Grupo Mexico had. Rather, Grupo Mexico had control over Southern Peru and thus over whether Southern Peru would take the steps necessary to make the Founding Stockholders' shares marketable under applicable securities regulations. Cerro and Phelps Dodge wanted to monetize their investment in Southern Peru and get out.

Thus, while the Special Committee was negotiating the terms of the Merger, Handelsman was engaged in negotiations of his own with Grupo Mexico. Cerro and Phelps Dodge had been seeking registration rights from Grupo Mexico (in its capacity as Southern Peru's controller) for their shares of Southern Peru stock, which they needed because of the volume restrictions imposed on affiliates of an issuer by SEC Rule 144.

The Court of Chancery found that it is not clear which party first proposed liquidity and support for the Founding Stockholders in connection with the Merger. But it is plain that the concept appears throughout the term sheets exchanged between Grupo Mexico and the Special Committee, and it is clear that Handelsman knew that registration rights would be part of the deal from the beginning of the Merger negotiations and that thus the deal would enable Cerro to sell as it desired. The Special Committee did not take the lead in negotiating the specific terms of the registration rights provisions — rather, it took the position that it wanted to leave the back-and-forth over the agreement details to Cerro and Grupo Mexico. Handelsman, however, played a key role in the negotiations with Grupo Mexico on Cerro's behalf.

At trial, Handelsman explained that there were two justifications for pursuing registration rights — one offered benefits exclusive to the Founding Stockholders, and the other offered benefits that would inure to Southern Peru's entire stockholder base. The first justification was that Cerro needed the registration rights in order to sell its shares quickly, and Cerro wanted "to get out" of its investment in Southern Peru. The second justification concerned the public market for Southern Peru stock.

Granting registration rights to the Founding Stockholders would allow Cerro and Phelps Dodge to sell their shares, increasing the amount of stock traded on the market and thus increasing Southern Peru's somewhat thin public float. This would in turn improve stockholder liquidity, generate more analyst exposure, and create a more efficient market for Southern Peru shares, all of which would benefit the minority stockholders. Handelsman thus characterized the registration rights situation as a "win-win," because "it permitted us to sell our stock" and "it was good for [Southern Peru] because they had a better float and they had a more organized sale of shares."

Handelsman's tandem negotiations with Grupo Mexico culminated in Southern Peru giving Cerro registration rights for its shares on October 21, 2004, the same day that the Special Committee approved the Merger. In exchange for registration rights, Cerro expressed its intent to vote its shares in favor of the Merger if the Special Committee recommended it. If the Special Committee made a recommendation against the Merger, or withdrew its recommendation in favor of it, Cerro was bound by the agreement to vote against the Merger.

[1230] Grupo Mexico's initial proposal, which Handelsman received on October 18, 2004 — a mere three days before the Special Committee was to vote on the Merger — was that it would grant Cerro registration rights in exchange for Cerro's agreement to vote in favor of the Merger. The Special Committee and Handelsman suggested instead that Cerro's vote on the Merger be tied to whether or not the Special Committee recommended the Merger. After discussing the matter with the Special Committee, Grupo Mexico agreed.

On December 22, 2004, after the Special Committee approved the Merger but well before the stockholder vote, Phelps Dodge entered into an agreement with Grupo Mexico that was similar to Cerro's, but did not contain a provision requiring Phelps Dodge to vote against the Merger if the Special Committee did. By contrast, Phelps Dodge's agreement only provided that, [t]aking into account that the Special Committee ... did recommend ... the approval of the [Merger], Phelps Dodge "express[es] [its] current intent, to [] submit its proxies to vote in favor of the [Merger]...." Thus, in the event that the Special Committee later withdrew its recommendation to approve the Merger, Cerro would be contractually bound to vote against it, but Grupo Mexico could still achieve the two-thirds vote required to approve the Merger solely with Phelps Dodge's cooperation. Under the terms of the Merger Agreement, the Special Committee was free to change its recommendation of the Merger, but it was not able to terminate the Merger Agreement on the basis of such a change. Rather, a change in the Special Committee's recommendation only gave Grupo Mexico the power to terminate the Merger Agreement.

This issue caused the Court of Chancery concern. Although it was not prepared on this record to find that Handelsman consciously agreed to a suboptimal deal for Southern Peru simply to achieve liquidity for Cerro from Grupo Mexico, it had little doubt that Cerro's own predicament as a stockholder dependent on Grupo Mexico's whim as a controller for registration rights influenced how Handelsman approached the situation. The Court of Chancery found that did not mean Handelsman consciously gave in, but it did mean that he was less than ideally situated to press hard. Put simply, Cerro was even more subject to the dominion of Grupo Mexico than smaller holders because Grupo Mexico had additional power over it because of the unregistered nature of its shares.

Most important to the Court of Chancery was that Cerro's desires, when considered alongside the Special Committee's actions, illustrate the tendency of control to result in odd behavior. During the negotiations of the Merger, Cerro had no interest in the long-term benefits to Southern Peru of acquiring Minera, nor did Phelps Dodge. Certainly, Cerro did not want any deal so disastrous that it would tank the value of Southern Peru completely, but nor did it have a rational incentive to say no to a suboptimal deal if that risked being locked into its investments.

The Court of Chancery found that Cerro wanted to sell and sell then and there. But as a Special Committee member, Handelsman did not act consistently with that impulse for all stockholders. He did not suggest that Grupo Mexico make an offer for Southern Peru, but instead pursued a long-term strategic transaction in which Southern Peru was the buyer. Accordingly, the Court of Chancery concluded that a short-term seller of a company's shares caused that company to be a long-term buyer.

[1231] After One Last Price Adjustment, Goldman Makes Its Final Presentation

On October 13, 2004, Grupo Mexico realized that it owned 99.15% of Minera rather than 98.84%, and the purchase price was adjusted to 67.2 million shares instead of 67 million shares to reflect the change in size of the interest being sold. On October 13, 2004, Southern Peru was trading at $45.90 per share, which meant that 67.2 million shares had a dollar worth of $3.08 billion.

On October 21, 2004, the Special Committee met to consider whether to recommend that the Board approve the Merger. At that meeting, Goldman made a final presentation to the Special Committee. The October 21, 2004 presentation stated that Southern Peru's implied equity value was $3.69 billion based on its then current market capitalization at a stock price of $46.41 and adjusting for debt. Minera's implied equity value is stated as $3.146 billion, which was derived entirely from multiplying 67.2 million shares by Southern Peru's $46.41 stock price and adjusting for the fact that Southern Peru was only buying 99.15% of Minera.

No standalone equity value of Minera was included in the Goldman October 21 presentation.^[9] Instead, the presentation included a series of relative DCF analyses and a "Contribution Analysis at Different EBITDA Scenarios," both of which were presented in terms of a hypothetical number of Southern Peru shares to be issued to Grupo Mexico for Minera. Goldman's relative DCF analyses provided various matrices showing the number of shares of Southern Peru that should be issued in exchange for Minera under various assumptions regarding the discount rate, the long-term copper price, the allocation of tax benefits, and the amount of royalties that Southern Peru would need to pay to the Peruvian government.

As it had in all of its previous presentations, Goldman used a range of long-term copper prices from $0.80 to $1.00 per pound. The DCF analyses generated a range of the number of shares to be issued in the Merger from 47.2 million to 87.8 million. Based on the then-current stock price of $45.92, this translated to $2.17 billion to $4.03 billion in cash value. Assuming the mid-range figures of a discount rate of 8.5% and a long-term copper price of $0.90 per pound, the analyses yielded a range of shares from 60.7 to 78.7 million.

Goldman's contribution analysis generated a range of 42 million to 56 million shares of Southern Peru to be issued based on an annualized 2004E EBITDA multiple (4.6x) and forecasted 2004E EBITDA multiple (5.0x), and a range of 53 million to 73 million shares based on an updated range of estimated 2005E EBITDA multiples (5.6x to 6.5x). Notably, the 2004E EBITDA multiples did not support the issuance of 67.2 million shares of Southern Peru stock in the Merger. But, [1232] 67.2 million shares falls at the higher end of the range of shares calculated using Southern Peru's 2005E EBITDA multiples.

As notable, these multiples were not the product of the median of the 2005E EBITDA multiples of comparable companies identified by Goldman (4.8x). Instead, the multiples used were even higher than Southern Peru's own higher 2005E EBITDA Wall Street consensus (5.5x) — an adjusted version of which was used as the bottom end of the range. These higher multiples were then attributed to Minera, a non-publicly traded company suffering from a variety of financial and operational problems.

Goldman opined that the Merger was fair from a financial perspective to the stockholders of Southern Peru, and provided a written fairness opinion.

Special Committee And Board Approve The Merger

After Goldman made its presentation, the Special Committee voted 3-0 to recommend the Merger to the Board. At the last-minute suggestion of Goldman, Handelsman decided not to vote in order to remove any appearance of conflict based on his participation in the negotiation of Cerro's registration rights, despite the fact that he had been heavily involved in the negotiations from the beginning and his hands had been deep in the dough of the now fully baked deal. The Board then unanimously approved the Merger and Southern Peru entered into the Merger Agreement.

Market Reacts To The Merger

The market reaction to the Merger was mixed and the parties have not presented any reliable evidence about it. That is, neither party had an expert perform an event study analyzing the market reaction to the Merger. Southern Peru's stock price traded down by 4.6% when the Merger was announced. When the preliminary proxy statement, which provided more financial information regarding the Merger terms, became public on November 22, 2004, Southern Peru's stock price again declined by 1.45%. But the stock price increased for two days after the final Proxy Statement was filed.

The Court of Chancery found that determining what effect the Merger itself had on this rise is difficult because, as the Plaintiff pointed out, this was not, as the Defendants contended, the first time that Southern Peru and Minera's financials were presented together. Rather, the same financial statements were in the preliminary Proxy Statement and the stock price fell. However, the Court of Chancery noted that the Plaintiff offered no evidence that these stock market fluctuations provided a reliable basis for assessing the fairness of the deal because it did not conduct a reliable event study.

The Court of Chancery found, in fact, against a backdrop of strong copper prices, the trading price of Southern Peru stock increased substantially by the time the Merger closed. By April 1, 2005, Southern Peru's stock price had a market value of $55.89 per share, an increase of approximately 21.7% over the October 21, 2004 closing price. The Court of Chancery found this increase could not be attributed to the Merger because other factors were in play. That included the general direction of copper prices, which lifted the market price of not just Southern Peru, but those of its publicly traded competitors. Furthermore, Southern Peru's own financial performance was very strong.

Goldman Does Not Update Its Fairness Analysis

Despite rising Southern Peru share prices and performance, the Special Committee [1233] did not ask Goldman to update its fairness analysis at the time of the stockholder vote on the Merger and closing — nearly five months after the Special Committee had voted to recommend it. At trial, Handelsman testified that he called a representative at Goldman to ask whether the transaction was still fair, but the Court of Chancery found that Handelsman's phone call hardly constitutes a request for an updated fairness analysis. The Court of Chancery also found that the Special Committee's failure to determine whether the Merger was still fair at the time of the Merger vote and closing was curious for two reasons.

First, for whatever the reason, Southern Peru's stock price had gone up substantially since the Merger was announced in October 2004. In March 2005, Southern Peru stock was trading at an average price of $58.56 a share. The Special Committee had agreed to a collarless fixed exchange ratio and did not have a walk-away right. The Court of Chancery noted an adroit Special Committee would have recognized the need to re-evaluate the Merger in light of Southern Peru's then-current stock price.

Second, Southern Peru's actual 2004 EBITDA became available before the stockholder vote on the Merger took place, and Southern Peru had smashed through the projections that the Special Committee had used for it. In the October 21 presentation, Goldman used a 2004E EBITDA for Southern Peru of $733 million and a 2004E EBITDA for Minera of $687 million. Southern Peru's actual 2004 EBITDA was $1.005 billion, 37% more and almost $300 million more than the projections used by Goldman. Minera's actual 2004 EBITDA, by contrast, was $681 million, 0.8% less than the projections used by Goldman.

The Court of Chancery noted that earlier, in Goldman's contribution analysis it relied on the values (measured in Southern Peru shares) generated by applying an aggressive range of Southern Peru's 2005E EBITDA multiples to Minera's A & S-adjusted and unadjusted projections, not the 2004E EBITDA multiple, and that the inaccuracy of Southern Peru's estimated 2004 EBITDA should have given the Special Committee serious pause. If the 2004 EBITDA projections of Southern Peru — which were not optimized and had been prepared by Grupo Mexico-controlled management — were so grossly low, it provided reason to suspect that the 2005 EBITDA projections, which were even lower than the 2004 EBITDA projections, were also materially inaccurate, and that the assumptions forming the basis of Goldman's contribution analysis should be reconsidered.

Moreover, Southern Peru made $303.4 million in EBITDA in the first quarter of 2005, over 52% of the estimate in Goldman's fairness presentation for Southern Peru's 2005 full year performance. Although the first-quarter 2005 financial statements, which covered the period from January 1, 2005 to March 31, 2005, would not have been complete by the time of the stockholder vote, the Court of Chancery reasonably assumed that, as directors of Southern Peru, the Special Committee had access to nonpublic information about Southern Peru's monthly profit and loss statements. Southern Peru later beat its EBITDA projections for 2005 by a very large margin, 135%, a rate well ahead of Minera's 2005 performance, which beat the deal estimates by a much lower 45%.

The Special Committee's failure to get a fairness update was even more of a concern to the Court of Chancery because Cerro had agreed to vote against the Merger if the Special Committee changed [1234] its recommendation. The Special Committee failed to obtain a majority of the minority vote requirement, but it supposedly agreed to a two-thirds vote requirement instead because a two-thirds vote still prevented Grupo Mexico from unilaterally approving the Merger. This out was only meaningful, however, if the Special Committee took the recommendation process seriously. If the Special Committee maintained its recommendation, Cerro had to vote for the Merger, and its vote combined with Grupo Mexico's vote would ensure passage. By contrast, if the Special Committee changed its recommendation, Cerro was obligated to vote against the Merger.

The Court of Chancery found the tying of Cerro's voting agreement to the Special Committee's recommendation was somewhat odd, in another respect. In a situation involving a third-party merger sale of a company without a controlling stockholder, the third party will often want to lock up some votes in support of a deal. A large blocholder and the target board might therefore negotiate a compromise, whereby the blocholder agrees to vote yes if the target board or special committee maintains a recommendation in favor of the transaction. In this situation, however, there is a factor not present here. In an arm's-length deal, the target usually has the flexibility to change its recommendation or terminate the original merger upon certain conditions, including if a superior proposal is available, or an intervening event makes the transaction impossible to recommend in compliance with the target's fiduciary duties.

Here, by contrast, Grupo Mexico faced no such risk of a competing superior proposal because it controlled Southern Peru. Furthermore, the fiduciary out that the Special Committee negotiated for in the Merger agreement provided only that the Special Committee could change its recommendation in favor of the Merger, not that it could terminate the Merger altogether or avoid a vote on the Merger. The only utility therefore of the recommendation provision was if the Special Committee seriously considered the events between the time of signing and the stockholder vote and made a renewed determination of whether the deal was fair. The Court of Chancery found there is no evidence of such a serious examination, despite important emerging evidence that the transaction's terms were skewed in favor of Grupo Mexico.

Southern Peru's Stockholders Approve The Merger

On March 28, 2005, the stockholders of Southern Peru voted to approve the Merger. More than 90% of the stockholders voted in favor of the Merger. The Merger then closed on April 1, 2005. At the time of closing, 67.2 million shares of Southern Peru had a market value of $3.75 billion.

Cerro Sells Its Shares

On June 15, 2005, Cerro, which had a basis in its stock of only $1.32 per share, sold its entire interest in Southern Peru in an underwritten offering at $40.635 per share. Cerro sold its stock at a discount to the then-current market price, as the low-high trading prices for one day before the sale were $43.08 to $44.10 per share. The Court of Chancery found that this illustrated Cerro's problematic incentives.

Plaintiff Sues Defendants and Special Committee

This derivative suit challenging the Merger, first filed in late 2004, moved too slowly, and it was not until June 30, 2010 that the Plaintiff moved for summary judgment. On August 10, 2010, the Defendants filed a cross-motion for summary judgment, or in the alternative, to shift the burden of proof to the Plaintiff under the [1235] entire fairness standard. On August 11, 2010, the individual Special Committee defendants cross-moved for summary judgment on all claims under Southern Peru's exculpatory provision adopted under title 8, section 102(b)(7) of the Delaware Code.

At a hearing held on December 21, 2010, the Court of Chancery dismissed the Special Committee defendants from the case because the plaintiff had failed to present evidence supporting a non-exculpated breach of their fiduciary duty of loyalty. It denied all other motions for summary judgment. The Court of Chancery noted that this, of course, did not mean that the Special Committee had acted adroitly or that the remaining defendants, Grupo Mexico and its affiliates, were immune from liability.

In contrast to the Special Committee defendants, precisely because the remaining directors were employed by Grupo Mexico, which had a self-dealing interest directly in conflict with Southern Peru, the exculpatory charter provision was of no benefit to them at that stage, given the factual question regarding their motivations. At trial, these individual Grupo Mexico-affiliated director defendants made no effort to show that they acted in good faith and were entitled to exculpation despite their lack of independence. In other words, the Grupo Mexico-affiliated directors did nothing to distinguish each other and none of them argued that he should not bear liability for breach of the duty of loyalty if the transaction was unfairly advantageous to Grupo Mexico, which had a direct self-dealing interest in the Merger. Accordingly, the Court of Chancery concluded that their liability would rise or fall with the issue of fairness.

In dismissing the Special Committee members on the summary judgment record, the Court of Chancery necessarily treated the predicament faced by Cerro and Handelsman, which involved facing additional economic pressures as a minority stockholder as a result of Grupo Mexico's control, differently than a classic self-dealing interest. The Court of Chancery continued to hold that view. Although it believed that Cerro, and therefore Handelsman, were influenced by Cerro's desire for liquidity as a stockholder, it seemed counterproductive to the Court of Chancery to equate a legitimate concern of a stockholder for liquidity from a controller into a self-dealing interest.

Therefore, the Court of Chancery concluded that there had to be a triable issue regarding whether Handelsman acted in subjective bad faith to force him to trial. The Court of Chancery concluded then on that record that no such issue of fact existed and even on the fuller trial record (where the Plaintiff actually made much more of an effort to pursue this angle), it still could not find that Handelsman acted in bad faith to purposely accept an unfair deal.

Nevertheless, the Court of Chancery found that Cerro, and therefore Handelsman, did have the sort of economic concern that ideally should have been addressed upfront and forthrightly in terms of whether the stockholder's interest well positioned its representative to serve on a special committee. Thus, although the Court of Chancery continued to be unpersuaded that it could label Handelsman as having acted with the state of mind required to expose him to liability, given the exculpatory charter protection to which he is entitled, it was persuaded that Cerro's desire to sell influenced how Handelsman approached his duties and compromised his effectiveness.

TRIAL SCHEDULE PROPERLY MAINTAINED

The Defendants' first argument is that the Court of Chancery erred by excluding [1236] the testimony of James Del Favero regarding the advice given to the Special Committee by its financial advisor, Goldman, on the ground that Del Favero was identified too late and allowing him to testify would be unfair to the Plaintiff. The Plaintiff contends that the Court of Chancery exercised sound discretion by refusing to modify the stipulated trial schedule in order to permit a new Goldman witness (Del Favero) to be deposed and testify weeks after the trial was scheduled to have concluded, when a video-taped deposition of the Special Committee's actual Goldman advisor was already in the record. Both parties agree, however, that whether the trial judge's ruling is characterized as an exclusion of evidence or a refusal to change the trial scheduling order, either action is reviewed on appeal for an abuse of discretion.^[10]

The record reflects that the Plaintiff obtained commissions for deposing three of the six members of the Goldman team identified in Goldman's pitch book to the Special Committee. By agreement of the parties, the Plaintiff deposed Martin Sanchez ("Sanchez") who was the head member of the Goldman team that advised the Special Committee. Sanchez was apparently the Goldman person to whom the Special Committee spoke most often.

Sanchez was deposed on October 21, 2009. He had not worked at Goldman since 2006. Accordingly, at the time of Sanchez's 2009 deposition, the Defendants were aware that neither they nor Goldman could control whether Sanchez would appear at trial. Sanchez's deposition was videotaped. Therefore, it was not simply a cold transcript.

The June 20, 2011 trial date was stipulated to by the parties and set by order of the Court of Chancery on February 10, 2011. On May 31, 2011, the Defendants notified the Plaintiff that Sanchez may not appear to testify at trial. The Defendants assert that they immediately began a search — three weeks before trial — for an alternative Goldman witness who would be available to testify. Their initial choice, however, was not Del Favero.

On June 9, 2011, when the Defendants informed the Plaintiff that Sanchez was "definitely not showing up" for trial, they identified Martin Werner ("Werner"), another Goldman member of the Special Committee advisory team, as their witness for trial. The Plaintiff did not object to the late identification of Werner but did seek to confirm that he would be able to depose Werner before trial. The Defendants' attorney responded, "Of course. I am not optimistic that we will get him to trial, in which case we will have no live Goldman witness."

On Monday, June 13, 2011, just twenty-four hours before the pretrial stipulation was due and one week before trial was scheduled to commence, the Defendants proposed for the first time that they call Del Favero as their live Goldman witness at trial. Unlike Sanchez or Werner, Del Favero was not offered to testify about the advice Goldman provided to the Special Committee, but rather about Goldman's internal processes relating to issuing fairness opinions. In proposing to call Del Favero as a witness, the Defendants stated: "We know that Your Honor had commented on[,] at the summary judgment hearing[,] the fairness opinion review process at Goldman Sachs and had some questions about that. We believe that he [1237] would be in a position to answer those questions."

Del Favero was not available to either testify during the long-established June trial dates or to be deposed before trial began on June 20. The Defendants suggested that Del Favero be deposed after every other trial witness had testified, and that the trial schedule be modified to reconvene sometime in July to allow Del Favero to testify several weeks after the trial was scheduled to conclude.

At the pretrial conference, the Plaintiff objected to the Defendants' proposal regarding Del Favero for several reasons. First, the Plaintiff argued that allowing Del Favero to be deposed and then testify after every other trial witness had testified, and the trial was otherwise concluded, would be unfair. Second, the Plaintiff objected to Del Favero's testimony because it was not directly relevant to the issues to be presented at trial since Del Favero was not a member of the Goldman team that advised the Special Committee, and had only attended one Special Committee meeting, during which Goldman only pitched its services. Third, the Plaintiff objected to the subject matter to which Del Favero would testify because it was the same subject matter on which counsel for Goldman and the Special Committee had precluded the Plaintiff from inquiring about at Sanchez's deposition.

The Court of Chancery held that Del Favero's inability to testify during the scheduled trial dates, or even to be deposed before the trial began, would unfairly prejudice the Plaintiff. In the Court of Chancery and on appeal, the Defendants assert that a live Goldman witness was central to their defense in light of the trial judge's comments made at the December 2010 summary judgment argument. In denying the Defendants' request to depose and to call Del Favero as a witness several weeks after the trial was scheduled to end, the trial judge noted that if his comments six months earlier at the summary judgment argument had caused the Defendants to reconsider their witness selection,

[T]hen I expect that you would have promptly identified this gentleman as a relevant witness and made him available for deposition. It's simply not fair to the plaintiffs.

Because the other thing about people who want to be witnesses is they get deposed, and when they get deposed, you learn things, and you might ask other people or shape your trial strategy differently. It just adds an unfair element of surprise. And in the 1930s, we decided with the Rules of Civil Procedure to eliminate surprise, at least insofar as your opponent was diligent and asked questions.

It's regrettable that the lead banker [Sanchez] for a client, even with the passage of time, would decline coming to testify. I understand he may be at a different institution, but, you know, he was the lead banker.

So I'll watch the [Sanchez] video and we'll deal with it then. Otherwise, we have a fairly truncated set-up of live witnesses; correct?

On appeal, the Defendants assert that "[i]t is difficult to see any harm — let alone unfair harm" if the bench trial had to be reconvened after several weeks to permit Del Favero to be deposed and to testify because the Plaintiff "allowed this case to languish unprosecuted for many years." The Defendants also argue, for the first time on appeal, that if deposing Del Favero after all "other trial testimony would have been problematic, the only fair solution would have been to postpone [commencement] of the trial for a short period to avoid prejudicing the Defendants."

[1238] Accordingly, the Defendants contend that the Court of Chancery's refusal to either postpone the commencement of the trial or to reconvene the trial should be reversed because "[a]llowing a proposed trial schedule to dictate which testimony can and cannot be presented by the parties would be the `tail wagging the dog.'" That argument reflects a fundamental misunderstanding of both fact and law. First, as a matter of fact, the June 20 start date for the trial was not proposed. It had been fixed by court order months earlier in February, with the agreement of the parties. Second, as a matter of law, to use the Defendants' analogy, a trial scheduling order is the dog and not the tail.

This Court has stated that "[p]arties must be mindful that scheduling orders are not merely guidelines but have [the same] full force and effect" as any other court order.^[11] Once the trial dates are set, the trial judge (the dog's handler) determines whether there is a manifest necessity for amending the trial scheduling order (changing the pace or direction of the dog). That determination is entrusted to the trial judge's discretion.^[12]

The record reflects that the trial judge refused to change the trial scheduling order to accommodate Del Favero's availability. The trial judge did not exclude Del Favero's testimony. Nor did the trial judge exclude trial testimony from any other Goldman witness. Sanchez was deposed, and the trial judge specifically stated he would "watch the video" of Sanchez's deposition. Because the trial judge excluded no testimony, this case is significantly different from the facts in the two cases relied upon by the Defendants, Drejka v. Hitchens Tire Service, Inc.,^[13] and Sheehan v. Oblates of St. Francis de Sales.^[14]

The Defendants' contention that the Court of Chancery committed reversible error because Del Favero's availability "could easily be accommodated during a bench trial" continues its misconception of the judicial process. Trial judges are vested with the discretion to resolve scheduling matters and to control their own docket.^[15] When an act of judicial discretion is at issue on appeal, this Court cannot substitute its opinion of what is right for that of the trial judge, if the trial judge's opinion was based upon conscience and reason, as opposed to arbitrariness or capriciousness.^[16]

The Court of Chancery's decision was neither arbitrary nor capricious. The Defendants sought to modify the stipulated trial schedule at the eleventh hour by requesting that the trial proceed on June 20, as scheduled, but then be continued until "sometime" in July, and that Del Favero be deposed and testify after every other trial witness had testified. The Court of Chancery ruled this was "simply not fair to the plaintiffs." The Court of Chancery noted that when witnesses "get deposed, you learn things, and you might ask other people or shape your trial strategy differently." The Court of Chancery also noted that if the Defendants had truly been concerned about having a live Goldman witness testify at trial, they could "have [1239] promptly identified this gentleman as a relevant witness and made him available for deposition."

The Defendants' assertion that they were prejudiced by not being able to present Del Favero's live testimony at trial is undermined by the record. First, several days before the trial was scheduled to commence, the Defendants acknowledged that they might not have a live Goldman witness to present at trial. Therefore, they would have to rely on the videotaped deposition of Sanchez. Second, in making their post-trial entire fairness arguments to the Court of Chancery, the Defendants stated "the record here is replete with evidence showing what Goldman Sachs did and why."

Del Favero was not available to be deposed, let alone to offer trial testimony, until weeks after the testimony of every other trial witness concluded. The Court of Chancery found the nature of the Defendants' eleventh-hour request to modify the long-standing trial dates would have been unfair to the Plaintiff. That finding is supported by the record and the product of a logical deductive reasoning process. We hold that the Court of Chancery properly exercised its discretion by refusing to modify the stipulated trial scheduling order to accommodate Del Favero's availability.

BURDEN SHIFTING ANALYSIS

The Defendants' second argument on appeal is that the Court of Chancery committed reversible error by failing to determine which party bore the burden of proof before trial. The Defendants submit that the Court of Chancery further erred by ultimately allocating the burden to the Defendants, because the Special Committee was independent, was well-functioning, and did not rely on the controlling shareholder for the information that formed the basis for its recommendation.

When a transaction involving self-dealing by a controlling shareholder is challenged, the applicable standard of judicial review is entire fairness, with the defendants having the burden of persuasion.^[17] In other words, the defendants bear the burden of proving that the transaction with the controlling stockholder was entirely fair to the minority stockholders. In the Court of Chancery and on appeal, both the Plaintiff and the Defendants agree that entire fairness is the appropriate standard of judicial review for the Merger.^[18]

The entire fairness standard has two parts: fair dealing and fair price.^[19] Fair dealing "embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained."^[20] Fair price "relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock."^[21]

[1240] In Kahn v. Lynch Communication Systems, Inc.,^[22] this Court held that when the entire fairness standard applies, the defendants may shift the burden of persuasion by one of two means: first, they may show that the transaction was approved by a well-functioning committee of independent directors; or second, they may show that the transaction was approved by an informed vote of a majority of the minority shareholders.^[23] Nevertheless, even when an interested cash-out merger transaction receives the informed approval of a majority of minority stockholders or a well-functioning committee of independent directors, an entire fairness analysis is the only proper standard of review.^[24] Accordingly, "[r]egardless of where the burden lies, when a controlling shareholder stands on both sides of the transaction the conduct of the parties will be viewed under the more exacting standard of entire fairness as opposed to the more deferential business judgment standard."^[25]

In Emerald Partners v. Berlin,^[26] we noted that "[w]hen the standard of review is entire fairness, ab initio, director defendants can move for summary judgment on either the issue of entire fairness or the issue of burden shifting."^[27] In this case, the Defendants filed a summary judgment motion, arguing that the Special Committee process shifted the burden of persuasion under the preponderance standard to the Plaintiff. The Court of Chancery found the summary judgment record was insufficient to determine that question of burden shifting prior to trial.

Lynch and its progeny^[28] set forth what is required of an independent committee for the defendants to obtain a burden shift. In this case, the Court of Chancery recognized that, in Kahn v. Tremont Corp.,^[29] this Court held that "[t]o obtain the benefit of a burden shifting, the controlling shareholder must do more than establish a perfunctory special committee of outside directors."^[30] Rather, the special committee must "function in a manner which indicates that the controlling shareholder did not dictate the terms of the transaction and that the committee exercised real bargaining power `at an arms-length.'"^[31] In this case, the Court of Chancery properly concluded that:

A close look at Tremont suggests that the [burden shifting] inquiry must focus on how the special committee actually negotiated the deal — was it "well functioning"^[32] — rather than just how the committee was set up. The test, therefore, [1241] seems to contemplate a look back at the substance, and efficacy, of the special committee's negotiations, rather than just a look at the composition and mandate of the special committee.^[33]

The Court of Chancery expressed its concern about the practical implications of such a factually intensive burden shifting inquiry because it is "deeply enmeshed" in the ultimate entire fairness analysis.

Subsuming within the burden shift analysis questions of whether the special committee was substantively effective in its negotiations with the controlling stockholder — questions fraught with factual complexity — will, absent unique circumstances, guarantee that the burden shift will rarely be determinable on the basis of the pretrial record alone.^[34] If we take seriously the notion, as I do, that a standard of review is meant to serve as the framework through which the court evaluates the parties' evidence and trial testimony in reaching a decision, and, as important, the framework through which the litigants determine how best to prepare their cases for trial,^[35] it is problematic to adopt an analytical approach whereby the burden allocation can only be determined in a post-trial opinion, after all the evidence and all the arguments have been presented to the court.

We agree with these thoughtful comments. However, the general inability to decide burden shifting prior to trial is directly related to the reason why entire fairness remains the applicable standard of review even when an independent committee is utilized, i.e., "because the underlying factors which raise the specter of impropriety can never be completely eradicated and still require careful judicial scrutiny."^[36]

This case is a perfect example. The Court of Chancery could not decide whether to shift the burden based upon the pretrial record. After hearing all of the evidence presented at trial, the Court of Chancery found that, although the independence of the Special Committee was not challenged, "from inception, the Special Committee fell victim to a controlled mindset and allowed Grupo Mexico to dictate the terms and structure of the merger." The Court of Chancery concluded that "although the Special Committee members were competent businessmen and may have had the best of intentions, they allowed themselves to be hemmed in by the controlling stockholder's demands."

We recognize that there are practical problems for litigants when the issue of [1242] burden shifting is not decided until after the trial.^[37] For example, "in order to prove that a burden shift occurred because of an effective special committee, the defendants must present evidence of a fair process. Because they must present this evidence affirmatively, they have to act like they have the burden of persuasion throughout the entire trial court process."^[38] That is exactly what happened in this case.

Delaware has long adhered to the principle that the controlling shareholders have the burden of proving an interested transaction was entirely fair.^[39] However, in order to encourage the use of procedural devices that foster fair pricing, such as special committees and minority stockholder approval conditions, this Court has provided transactional proponents with what has been described as a "modest procedural benefit — the shifting of the burden of persuasion on the ultimate issue of entire fairness to the plaintiffs — if the transaction proponents proved, in a factually intensive way, that the procedural devices had, in fact, operated with integrity."^[40] We emphasize that in Cox, the procedural benefit of burden shifting was characterized as "modest."

Once again, in this case, the Court of Chancery expressed uncertainty about whether "there is much, if any, practical implication of a burden shift." According to the Court of Chancery, "[t]he practical effect of the Lynch doctrine's burden shift is slight. One reason why this is so is that shifting the burden of persuasion under a preponderance standard is not a major move, if one assumes ... that the outcome of very few cases hinges on what happens if ... the evidence is in equipoise."^[41]

In its post-trial opinion, the Court of Chancery found that the burden of persuasion remained with the Defendants, because the Special Committee was not "well functioning."^[42] The trial judge also found, "however, that this determination matters little because I am not stuck in equipoise about the issue of fairness. Regardless of who bears the burden, I conclude that the Merger was unfair to Southern Peru and its stockholders."

Nothing in the record reflects that a different outcome would have resulted if either the burden of proof had been shifted to the Plaintiff, or the Defendants had been advised prior to trial that the burden had not shifted. The record reflects that, by agreement of the parties, each witness other than the Plaintiff's expert was called in direct examination by the Defendants, and then was cross-examined by the Plaintiff. The Defendants have not identified any decision they might have made differently, if they had been advised prior to trial that the burden of proof had not shifted.

The Court of Chancery concluded that this is not a case where the evidence of fairness or unfairness stood in equipoise. It found that the evidence of unfairness was so overwhelming that the question of who had the burden of proof at trial was [1243] irrelevant to the outcome. That determination is supported by the record. The Court of Chancery committed no error by not allocating the burden of proof before trial, in accordance with our prior precedents. In the absence of a renewed request by the Defendants during trial that the burden be shifted to the Plaintiff, the burden of proving entire fairness remained with the Defendants throughout the trial.^[43] The record reflects that is how the trial in this case was conducted.

Nevertheless, we recognize that the purpose of providing defendants with the opportunity to seek a burden shift is not only to encourage the use of special committees,^[44] but also to provide a reliable pretrial guide for the parties regarding who has the burden of persuasion.^[45] Therefore, which party bears the burden of proof must be determined, if possible, before the trial begins. The Court of Chancery has noted that, in the interest of having certainty, "it is unsurprising that few defendants have sought a pretrial hearing to determine who bears the burden of persuasion on fairness" given "the factually intense nature of the burden-shifting inquiry" and the "modest benefit" gained from the shift.^[46]

The failure to shift the burden is not outcome determinative under the entire fairness standard of review. We have concluded that, because the only "modest" effect of the burden shift is to make the plaintiff prove unfairness under a preponderance of the evidence standard, the benefits of clarity in terms of trial presentation outweigh the costs of continuing to decide either during or after trial whether the burden has shifted. Accordingly, we hold prospectively that, if the record does not permit a pretrial determination that the defendants are entitled to a burden shift, the burden of persuasion will remain with the defendants throughout the trial to demonstrate the entire fairness of the interested transaction.

The Defendants argue that if the Court of Chancery rarely determines the issue of burden shifting on the basis of a pretrial record, corporations will be dissuaded from forming special committees of independent directors and from seeking approval of an interested transaction by an informed vote of a majority of the minority shareholders. That argument underestimates the importance of either or both actions to the process component — fair dealing — of the entire fairness standard. This Court has repeatedly held that any board process is materially enhanced when the decision is attributable to independent directors.^[47] Accordingly, judicial review for entire fairness of how the transaction [1244] was structured, negotiated, disclosed to the directors, and approved by the directors will be significantly influenced by the work product of a properly functioning special committee of independent directors.^[48] Similarly, the issue of how stockholder approval was obtained will be significantly influenced by the affirmative vote of a majority of the minority stockholders.^[49]

A fair process usually results in a fair price. Therefore, the proponents of an interested transaction will continue to be incentivized to put a fair dealing process in place that promotes judicial confidence in the entire fairness of the transaction price. Accordingly, we have no doubt that the effective use of a properly functioning special committee of independent directors and the informed conditional approval of a majority of minority stockholders will continue to be integral parts of the best practices that are used to establish a fair dealing process.

UNFAIR DEALING PRODUCES UNFAIR PRICE

Although the entire fairness standard has two components, the entire fairness analysis is "not a bifurcated one as between fair dealing and fair price. All aspects of the issue must be examined as a whole since the question is one of entire fairness."^[50] In a non-fraudulent transaction, "price may be the preponderant consideration outweighing other features of the merger."^[51] Evidence of fair dealing has significant probative value to demonstrate the fairness of the price obtained. The paramount consideration, however, is whether the price was a fair one.^[52]

The Court of Chancery found that the process by which the Merger was negotiated and approved was not fair and did not result in the payment of a fair price. Because the issues relating to fair dealing and fair price were so intertwined, the Court of Chancery did not separate its analysis, but rather treated them together in an integrated examination. That approach is consistent with the inherent non-bifurcated nature of the entire fairness standard of review.^[53]

The independence of the members of the Special Committee was not challenged by the Plaintiff. The Court of Chancery found that the Special Committee members were competent, well-qualified individuals with business experience. The Court of Chancery also found that the Special Committee was "given the resources to hire outside advisors, and it hired not only respected, top tier of the market financial and legal counsel, but also a mining consultant and Mexican counsel." Nevertheless, the Court of Chancery found that, although the Special Committee members had their "hands ... on the oars[,]" the boat went "if anywhere, backward[.]"

The Special Committee began its work with a narrow mandate, to "evaluate a transaction suggested by the majority stockholder." The Court of Chancery found that "the Special Committee members' understanding of their mandate ... evidenced their lack of certainty about whether the Special Committee could do more than just evaluate the Merger." The [1245] Court of Chancery concluded that, although the Special Committee went beyond its limited mandate and engaged in negotiations, "its approach to negotiations was stilted and influenced by its uncertainty about whether it was actually empowered to negotiate."

Accordingly, the Court of Chancery determined that "from inception, the Special Committee fell victim to a controlled mindset and allowed Grupo Mexico to dictate the terms and structure of the Merger." The Special Committee did not ask for an expansion of its mandate to look at alternatives. Instead, the Court of Chancery found that the Special Committee "accepted that only one type of transaction was on the table, a purchase of Minera by Southern Peru."

In its post-trial opinion, the Court of Chancery stated that this "acceptance" influenced the ultimate determination of unfairness, because "it took off the table other options that would have generated a real market check and also deprived the Special Committee of negotiating leverage to extract better terms." The Court of Chancery summarized these dynamics as follows:

In sum, although the Special Committee members were competent businessmen and may have had the best of intentions, they allowed themselves to be hemmed in by the controlling stockholder's demands. Throughout the negotiation process, the Special Committee's and Goldman's focus was on finding a way to get the terms of the Merger structure proposed by Grupo Mexico to make sense, rather than aggressively testing the assumption that the Merger was a good idea in the first place.

Goldman made its first presentation to the Special Committee on June 11, 2004. Goldman's conclusions were summarized in an "Illustrative Give/Get Analysis." The Court of Chancery found this analysis "made patent the stark disparity between Grupo Mexico's asking price and Goldman's valuation of Minera: Southern Peru would `give' stock with a market price of $3.1 billion to Grupo Mexico and would `get' in return an asset worth no more than $1.7 billion."

According to the Court of Chancery, the Special Committee's controlled mindset was illustrated by what happened after Goldman's initial analysis could not value the "get" — Minera — anywhere near Grupo Mexico's asking price, the "give":

From a negotiating perspective, that should have signaled that a strong response to Grupo Mexico was necessary and incited some effort to broaden, not narrow, the lens. Instead, Goldman and the Special Committee went to strenuous lengths to equalize the values of Southern Peru and Minera. The onus should have been on Grupo Mexico to prove Minera was worth $3.1 billion, but instead of pushing back on Grupo Mexico's analysis, the Special Committee and Goldman devalued Southern Peru and topped up the value of Minera. The actions of the Special Committee and Goldman undermine the defendants' argument that the process leading up to the Merger was fair and lend credence to the plaintiff's contention that the process leading up to the Merger was an exercise in rationalization.

The Court of Chancery found that, following Goldman's first presentation, the Special Committee abandoned a focus on whether Southern Peru would get $3.1 billion in value in an exchange. Instead, the Special Committee moved to a "relative valuation" methodology that involved comparing the values of Southern Peru and Minera. On June 23, 2004, Goldman advised the Special Committee that Southern Peru's DCF value was $2.06 billion and, [1246] thus, approximately $1.1 billion below Southern Peru's actual NYSE market price at that time.

The Court of Chancery was troubled by the fact that the Special Committee did not use this valuation gap to question the relative valuation methodology. Instead, the Special Committee was "comforted" by the analysis, which allowed them to conclude that DCF value of Southern Peru's stock (the "give") was not really worth its market value of $3.1 billion. The Court of Chancery found that:

A reasonable special committee would not have taken the results of those analyses by Goldman and blithely moved on to relative valuation, without any continuing and relentless focus on the actual give-get involved in real cash terms. But, this Special Committee was in the altered state of a controlled mindset. Instead of pushing Grupo Mexico into the range suggested by Goldman's analysis of Minera's fundamental value, the Special Committee went backwards to accommodate Grupo Mexico's asking price — an asking price that never really changed.

The Court of Chancery concluded "[a] reasonable third-party buyer free from a controlled mindset would not have ignored a fundamental economic fact that is not in dispute here — in 2004, Southern Peru stock could have been sold for [the] price at which it was trading on the New York Stock Exchange."

In this appeal, the Defendants contend that the Court of Chancery did not understand Goldman's analysis and rejected their relative valuation of Minera without an evidentiary basis. According to the Defendants, a relative valuation analysis is the appropriate way to perform an accurate comparison of the value of Southern Peru, a publicly-traded company, and Minera, a private company. In fact, the Defendants continue to argue that relative valuation is the only way to perform an "apples-to-apples" comparison of Southern Peru and Minera.

Moreover, the Defendants assert that Goldman and the Special Committee did actually believe that Southern Peru's market price accurately reflected the company's value. According to the Defendants, however, there were certain assumptions reflected in Southern Peru's market price that were not reflected in its DCF value, i.e., the market's view of future copper price increases. Therefore, the Defendants submit that:

If the DCF analysis was missing some element of value for [Southern Peru], it would also miss that very same element of value for Minera. In short, at the time that Goldman was evaluating Minera, its analysis of [Southern Peru] demonstrated that mining companies were trading at a premium to their DCF values. The relative valuation method allowed Goldman to account for this information in its analysis and value Minera fairly.

Accordingly, the Defendants argue that the Court of Chancery failed to recognize that the difference between Southern Peru's DCF and market values also implied a difference between Minera's DCF value and its market value.

The Defendants take umbrage at the Court of Chancery's statement that "the relative valuation technique is not alchemy that turns a sub-optimal deal into a fair one." The Court of Chancery's critical comments regarding a relative value methodology were simply a continuation of its criticism about how the Special Committee operated. The record indicates that the Special Committee's controlled mindset was reflected in its assignments to Goldman. According to the Court of Chancery, "Goldman appears to have helped its client [1247] rationalize the one strategic option available within the controlled mindset that pervaded the Special Committee's process."

The Defendants continue to argue that the Court of Chancery would have understood that "relative valuation" was the "appropriate way" to compare the values of Southern Peru and Minera if a Goldman witness (Del Favero) had testified at trial. As noted earlier, that argument is inconsistent with the Defendants' post-trial assertion that the record was replete with evidence of what Goldman did (a relative valuation analysis) and why that was done. That argument also disregards the trial testimony of the Defendants' expert witness, Professor Schwartz, who used the same relative valuation methodology as Goldman.

Prior to trial, the Defendants represented that Professor Schwartz would be called at trial to "explain that the most reliable way to compare the value of [Southern Peru] and Minera for purposes of the Merger was to conduct a relative valuation." In their pretrial proffer, the Defendants also represented that Professor Schwartz's testimony would demonstrate that "based on relative valuations of Minera and [Southern Peru] using a reasonable range of copper prices ... the results uniformly show that the Merger was fair to [Southern Peru] and its stockholders."

At trial, Professor Schwartz attributed the difference between Southern Peru's DCF value and its market value to the fact that the market was valuing Southern Peru's stock "at an implied copper price of $1.30." Professor Schwartz testified, "if I use $1.30, it gives me the market price of [Southern Peru] and it gives me a market price of Minera Mexico which still makes the transaction fair." In other words, it was fair to "give" Grupo Mexico $3.75 billion of Southern Peru stock because Minera's DCF value, using an assumed long-term copper price of $1.30, implied a "get" of more than $3.7 billion.

The Court of Chancery found that Professor Schwartz's conclusion that the market was assuming a long-term copper price of $1.30 in valuing Southern Peru was based entirely on post-hoc speculation, because there was no credible evidence in the record that anyone at the time of the Merger contemplated a $1.30 long-term copper price. In fact, Southern Peru's own public filings referenced $0.90 per pound as the appropriate long-term copper price. The Court of Chancery summarized its findings as follows:

Thus, Schwartz's conclusion that the market was assuming a long-term copper price of $1.30 in valuing Southern Peru appears to be based entirely on post-hoc speculation. Put simply, there is no credible evidence of the Special Committee, in the heat of battle, believing that the long-term copper price was actually $1.30 per pound but using $0.90 instead to give Southern Peru an advantage in the negotiation process.

The Court of Chancery also noted that Professor Schwartz did not produce a standalone equity value for Minera that justified issuing shares of Southern Peru stock worth $3.1 billion at the time the Merger Agreement was signed.

The record reflects that the Court of Chancery did understand the Defendants' argument and that its rejection of the Defendants' "relative valuation" of Minera was the result of an orderly and logical deductive reasoning process that is supported by the record. The Court of Chancery acknowledged that relative valuation is a valid valuation methodology. It also recognized, however, that since "relative valuation" is a comparison of the DCF values of Minera and Southern Peru, the result is only as reliable as the input data [1248] used for each company. The record reflects that the Court of Chancery carefully explained its factual findings that the data inputs Goldman and Professor Schwartz used for Southern Peru in the Defendants' relative valuation model for Minera were unreliable.

The Court of Chancery weighed the evidence presented at trial and set forth in detail why it was not persuaded that "the Special Committee relied on truly equal inputs for its analyses of the two companies." The Court of Chancery found that "Goldman and the Special Committee went to strenuous lengths to equalize the value of Southern Peru and Minera." In particular, the Court of Chancery found that "when performing the relative valuation analysis, the cash flows for Minera were optimized to make Minera an attractive acquisition target, but no such dressing up was done for Southern Peru."

The Court of Chancery also noted that Goldman never advised the Special Committee that Minera was worth $3.1 billion, or that Minera could be acquired at, or would trade at, a premium to its DCF value if it were a public company. Nevertheless, the Court of Chancery found "the Special Committee did not respond to its intuition that Southern Peru was overvalued in a way consistent with its fiduciary duties or the way that a third-party buyer would have." Accordingly, the Court of Chancery concluded:

The Special Committee's cramped perspective resulted in a strange deal dynamic, in which a majority stockholder kept its eye on the ball — actual value benchmarked to cash — and a Special Committee lost sight of market reality in an attempt to rationalize doing a deal of the kind the majority stockholder proposed. After this game of controlled mindset twister and the contortions it involved, the Special Committee agreed to give away over $3 billion worth of actual cash value in exchange for something worth demonstrably less, and to do so on terms that by consummation made the value gap even worse, without using any of its contractual leverage to stop the deal or renegotiate its terms. Because the deal was unfair, the defendants breached their fiduciary duty of loyalty.

Entire fairness is a standard by which the Court of Chancery must carefully analyze the factual circumstances, apply a disciplined balancing test to its findings, and articulate the bases upon which it decides the ultimate question of entire fairness.^[54] The record reflects that the Court of Chancery applied a "disciplined balancing test," taking into account all relevant factors.^[55] The Court of Chancery considered the issues of fair dealing and fair price in a comprehensive and complete manner. The Court of Chancery found the process by which the Merger was negotiated and approved constituted unfair dealing and that resulted in the payment of an unfair price.

The Court of Chancery's post-trial determination of entire fairness must be accorded substantial deference on appeal.^[56] The Court of Chancery's factual findings are supported by the record and its conclusions are the product of an orderly and [1249] logical deductive reasoning process.^[57] Accordingly, the Court of Chancery's judgment, that the Merger consideration was not entirely fair, is affirmed.^[58]

DAMAGE AWARD PROPER

In the Court of Chancery, the Plaintiff sought an equitable remedy that cancelled or required the Defendants to return to Southern Peru the shares that Southern Peru issued in excess of Minera's fair value. In the alternative, the Plaintiff asked for rescissory damages in the amount of the then present market value of the excess number of shares that Grupo Mexico held as a result of Southern Peru paying an unfair price in the Merger.

In the Court of Chancery and on appeal, the Defendants argue that no damages are due because the Merger consideration was more than fair. In support of that argument, the Defendants rely on the fact that Southern Peru stockholders should be grateful, because the market value of Southern Peru's stock continued on a generally upward trajectory in the years after the Merger. Alternatively, the Defendants argue that any damage award should be at most a fraction of the amount sought by the Plaintiff, and, in particular, that the Plaintiff has waived the right to seek rescissory damages because of "his lethargic approach to litigating the case."

The Court of Chancery rejected the Defendants' argument that the post-Merger performance of Southern Peru's stock eliminates the need for damages. It noted that the Defendants did not "present a reliable event study about the market's reaction to the Merger, and there is evidence that the market did not view the Merger as fair in spite of material gaps in disclosure about the fairness of the Merger." The trial judge was of the opinion that a "transaction like the Merger can be unfair, in the sense that it is below what a real arms-length deal would have been priced at, while not tanking a strong company with sound fundamentals in a rising market, such as the one in which Southern Peru was a participant. That remains my firm sense here...." The Court of Chancery's decision to award some amount of damages is supported by the record and the product of a logical deductive reasoning process.

Nevertheless, the Court of Chancery did agree with the Defendants' argument that the Plaintiff's delay in litigating the case rendered it inequitable to use a rescission-based approach in awarding damages.^[59] The Court of Chancery reached that determination because "[r]escissory damages are the economic equivalent of rescission and[,] therefore[,] if rescission itself is unwarranted because of the plaintiff's delay, so are rescissory damages."^[60] Instead of entering a rescission-based remedy, the Court of Chancery decided to craft a damage award, as explained below:

[The award] approximates the difference between the price that the Special Committee would have approved had the Merger been entirely fair (i.e., absent a breach of fiduciary duties) and the price that the Special Committee actually agreed to pay. In other words, I will take the difference between this fair price and the market value of 67.2 million [1250] shares of Southern Peru stock as of the Merger date. That difference, divided by the average closing price of Southern Peru stock in the 20 trading days preceding the issuance of this opinion, will determine the number of shares that the defendants must return to Southern Peru. Furthermore, because of the plaintiff's delay, I will only grant simple interest on that amount, calculated at the statutory rate since the date of the Merger.^[61]

After determining the nature of the damage award, the Court of Chancery determined the appropriate valuation for the price that the Special Committee should have paid. To calculate a fair price for remedy purposes, the Court of Chancery balanced three separate values. The first value was a standalone DCF value of Minera. Using defendant-friendly modifications to the Plaintiff's expert's DCF valuation, the Court of Chancery calculated that a standalone equity value for Minera as of October 21, 2004 was $2.452 billion. The second value was the market value of the Special Committee's 52 million share counteroffer made in July 2004, "which was sized based on months of due diligence by Goldman about Minera's standalone value, calculated as of the date on which the Special Committee approved the Merger." Because Grupo Mexico wanted a dollar value of stock, the Court of Chancery fixed the value at what 52 million Southern Peru shares were worth as of October 21, 2004, the date on which the Special Committee approved the Merger, at $2.388 billion, giving Minera credit for the price growth to that date. The third value was the equity value of Minera derived from a comparable companies analysis using the companies identified by Goldman. Using the median premium for merger transactions in 2004, calculated by Mergerstat to be 23.4%, and applying that premium to the value derived from the Court of Chancery's comparable companies analysis yielded a value of $2.45 billion.

The Court of Chancery gave those three separate values equal weight in its damages equation: (($2.452 billion + $2.388 billion + $2.45 billion)/3). The result was a value of $2.43 billion. It then made an adjustment to reflect the fact that Southern Peru bought 99.15%, not 100%, of Minera, which yielded a value of $2.409 billion. The value of 67.2 million Southern Peru shares as of the Merger Date was $3.756 billion.^[62] Therefore, the base damage award by the Court of Chancery amounted to $1.347 billion.^[63] The Court of Chancery then added interest from the Merger Date, at the statutory rate, without compounding and with that interest to run until time of the judgment and until payment.

The Court of Chancery stated that Grupo Mexico could satisfy the judgment by agreeing to return to Southern Peru such number of its shares as are necessary to satisfy this remedy. The Court of Chancery also ruled that any attorneys' fees would be paid out of the award.

The Defendants' first objection to the Court of Chancery's calculation of damages is that its methodology included the Special Committee's counteroffer of July 2004 as a measure of the true value of Minera. The Defendants assert that the counteroffer was "based only on Goldman's preliminary analyses of the companies before the completion of due diligence. And there was no evidence this was anything [1251] other than what it appears to be — a negotiating position."

The Court of Chancery explained its reason for including the counteroffer in its determination of damages, as follows:

In fact, you know, the formula I used, one of the things that I did to be conservative was actually to use a bargaining position of the special committee. And I used it not because I thought it was an aggressive bargaining position of the special committee, but to give the special committee and its advisors some credit for thinking. It was one of the few indications in the record of something that they thought was actually a responsible value.

And so it was actually not put in there in any way to inflate. It was actually to give some credit to the special committee. If I had thought that it was an absurd ask, I would have never used it. I didn't think it was any, really, aggressive bargaining move. I didn't actually see any aggressive bargaining moves by the special committee. I saw some innovative valuation moves, but I didn't see any aggressive bargaining moves.

The record reflects that the value of Minera pursuant to the counteroffer ($2.388 billion) was very close to the other two values used by the Court of Chancery ($2.452 billion and $2.45 billion). The Court of Chancery properly exercised its discretion — for the reasons it stated — by including the Special Committee's counteroffer as one of the component parts in its calculation of damages. Therefore, the Defendants' argument to the contrary is without merit.

The Defendants also argue that the Court of Chancery "essentially became its own expert witness regarding damages by basing its valuation, at least in part, on its own computer models." In support of that argument, the Defendants rely upon the following statement by the trial judge during oral argument on the fee award: "I'm not going to disclose everything that we got on our computer system, but I can tell you that there are very credible remedial approaches in this case that would have resulted in a much higher award." The Defendants submit that "[i]n the absence of proof from [the] Plaintiff, this speculation and outside-the-record financial modeling is impermissible."

In making a decision on damages, or any other matter, the trial court must set forth its reasons. This provides the parties with a record basis to challenge the decision. It also enables a reviewing court to properly discharge its appellate function.

In this case, the Court of Chancery explained the reasons for its calculation of damages with meticulous detail. That complete transparency of its actual deliberative process provided the Defendants with a comprehensive record to use in challenging the Court of Chancery's damage award on appeal and for this Court to review. Accordingly, any remedial approaches that the Court of Chancery may have considered and rejected are irrelevant.

The Court of Chancery has the historic power "to grant such ... relief as the facts of a particular case may dictate."^[64] Both parties agree that an award of damages by the Court of Chancery after trial in an entire fairness proceeding is reviewed on appeal for abuse of discretion.^[65] [1252] It is also undisputed that the Court of Chancery has greater discretion when making an award of damages in an action for breach of duty of loyalty than it would when assessing fair value in an appraisal action.^[66]

In this case, the Court of Chancery awarded damages based on the difference in value between what was paid (the "give") and the value of what was received (the "get"). In addition to an actual award of monetary relief, the Court of Chancery had the authority to grant pre- and post-judgment interest, and to determine the form of that interest.^[67] The record reflects that the Court of Chancery properly exercised its broad historic discretionary powers in fashioning a remedy and making its award of damages. Therefore, the Court of Chancery's judgment awarding damages is affirmed.

ATTORNEYS' FEE AWARD

The Plaintiff petitioned for attorneys' fees and expenses representing 22.5% of the recovery plus post-judgment interest. The Court of Chancery awarded 15% of the $2.031 billion judgment, or $304,742,604.45, plus post-judgment interest until the attorneys' fee and expense award is satisfied ("Fee Award"). The Court of Chancery found that the Fee Award "fairly implements the most important factors our Supreme Court has highlighted under Sugarland,^[68] including the importance of benefits," and "creates a healthy incentive for plaintiff's lawyers to actually seek real achievement for the companies that they represent in derivative actions and the classes that they represent in class actions."

On appeal, the Defendants contend "the Court of Chancery abuse[d] its discretion by granting an unreasonable fee award of over $304 million that pays the Plaintiff's counsel over $35,000 per hour worked and 66 times the value of their time and expenses." Specifically, they argue the Court of Chancery gave the first Sugarland factor, i.e. the benefit achieved, "dispositive weight," and that the remaining factors do not support the Fee Award. The Defendants also argue that the Court of Chancery erred by failing to assess the reasonableness of the Fee Award. They submit that the Court of Chancery did not: correctly apply a declining percentage analysis given the size of the judgment; consider whether the resulting hourly rate was reasonable under the circumstances; and evaluate whether the Fee Award conformed to the Delaware Rules of Professional Conduct.^[69] The Defendants further contend that the Court of Chancery committed reversible error by "[a]llowing Plaintiff's attorneys to collect fees premised upon the nearly $700 million in prejudgment interest ... even in spite of the fact that the delay impeded a full presentation of the evidence."

Common Fund Doctrine

Under the common fund doctrine, "a litigant or a lawyer who recovers a [1253] common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole."^[70] The common fund doctrine is a well-established basis for awarding attorneys' fees in the Court of Chancery.^[71] It is founded on the equitable principle that those who have profited from litigation should share its costs.^[72]

"Typically, successful derivative or class action suits which result in the recovery of money or property wrongfully diverted from the corporation ... are viewed as fund creating actions."^[73] In this case, the record supports the Court of Chancery's finding that Defendants breached their duty of loyalty by exchanging over $3 billion worth of actual cash value for something that was worth much less. The record also supports the Court of Chancery's determination that the $2.031 billion judgment resulted in the creation of a common fund. Accordingly, Plaintiff's counsel, whose efforts resulted in the creation of that common fund, are entitled to receive a reasonable fee and reimbursement for expenses from that fund.^[74]

Calculating Common Fund Attorneys' Fees

In the United States, there are two methods of calculating fee awards in common fund cases: the percentage of the fund method and the lodestar method.^[75] Under a percentage of the fund method, courts calculate fees based on a reasonable percentage of the common fund.^[76] The lodestar method multiplies hours reasonably expended against a reasonable hourly rate to produce a "lodestar," which can then be adjusted through application of a "multiplier," to account for additional factors such as the contingent nature of the case and the quality of an attorney's work.^[77]

Beginning in 1881, fees were calculated and awarded from a common fund based on a percentage of that fund.^[78] Fees continued to be calculated on a percentage approach for almost 100 years. During the 1970s, however, courts began to use the lodestar method to calculate fee awards in common fund cases.^[79]

[1254] In the 1980s, two events led to the reconsideration of the lodestar method. First, in 1984, the United States Supreme Court suggested that an award in a common fund case should be based upon a percentage of the fund.^[80] By that time, "the point that `under the common fund doctrine ... a reasonable fee is based on a percentage of the fund bestowed on the class' was so well settled that no more than a footnote was needed to make it."^[81] Second, in 1985, a Third Circuit Task Force issued a report concluding that all attorney fee awards in common fund cases should be structured as a percentage of the fund.^[82] The report criticized the use of the lodestar method for determining the reasonableness of attorneys' fees in common fund class actions and listed nine deficiencies in the lodestar method.^[83] "Ultimately, the Third Circuit allowed district court judges to exercise discretion in employing the percentage of the fund method, the lodestar method, or some combination of both, but the concerns voiced in the 1985 report, as well as in other publications, were not fully answered."^[84] Today, after several years of experimentation with the lodestar method, "the vast majority of courts of appeals now permit or direct courts to use the percentage method in common-fund cases."^[85]

Delaware's Sugarland Standard

In Sugarland Industries, Inc. v. Thomas, this Court rejected any mechanical approach to determining common fund fee awards.^[86] In particular, we explicitly disapproved the Third Circuit's "lodestar method."^[87] Therefore, Delaware courts are not required to award fees based on hourly rates that may not be commensurate with the value of the common fund created by the attorneys' efforts. Similarly, in Sugarland, we did not adopt an inflexible percentage of the fund approach.

Instead, we held that the Court of Chancery should consider and weigh the following factors in making an equitable award of attorney fees: 1) the results achieved; 2) the time and effort of counsel; 3) the relative complexities of the litigation; 4) any contingency factor; and 5) the standing and ability of counsel involved.^[88] Delaware courts have assigned the greatest weight to the benefit achieved in litigation.^[89]

[1255] Sugarland Factors Applied

The determination of any attorney fee award is a matter within the sound judicial discretion of the Court of Chancery.^[90] In this case, the Court of Chancery considered and applied each of the Sugarland factors. In rendering its decision on the Fee Award, the Court of Chancery began with the following overview:

When the efforts of a plaintiff on behalf of a corporation result in the creation of a common fund, the Court should award reasonable attorneys' fees and expenses incurred by the plaintiff in achieving the benefit. Typically a-percentage-of-the-benefit approach is used if the benefit achieved is quantifiable.... And determining the percentage of the fund to award is a matter within the Court's discretion.

The aptly-named Sugarland factor[s], perhaps never more aptly-named than today, tell us to look at the benefit achieved, the difficulty and complexity of the litigation, the effort expended, the risk-taking, [and] the standing and ability of counsel. But the most important factor, the cases suggest, is the benefit. In this case it's enormous — a common fund of over 1.3 billion plus interest.

The Court of Chancery then addressed each of the Sugarland factors. The result was its decision to award the Plaintiff's counsel attorneys' fees and expenses equal to 15% of the amount of the common fund.

Benefit Achieved

With regard to the first and most important of the Sugarland factors, the benefit achieved, the Court of Chancery found that "[t]he plaintiffs here indisputably prosecuted this action through trial and secured an immense economic benefit for Southern Peru." The Court of Chancery stated that "this isn't small and this isn't monitoring. This isn't a case where it's rounding, where the plaintiffs share credit."^[91] The Court of Chancery concluded that "anything that was achieved ... by this litigation [was] by these plaintiffs." With pre-judgment interest, the benefit achieved through the litigation amounts to more than $2 billion. Post-judgment interest accrues at more than $212,000 per day. The extraordinary benefit that was achieved in this case merits a very substantial award of attorneys' fees.

The Defendants take issue with the fact that the Fee Award was based upon the total damage award, which included pre-judgment interest. They contend that including such interest in the damage award is reversible error because the Plaintiff took too long to litigate this matter. The record reflects that the Court of Chancery considered the slow pace of the litigation in making the Fee Award. In response to the Defendants' [1256] arguments, the trial judge stated: "I'm not going to ... exclude interest altogether. I get that argument.... The interest I awarded is fairly earned by the plaintiffs. It's a lower amount. And, again, I've taken that [pace of litigation] into account by the percentage that I'm awarding." The Court of Chancery's decision to include pre-judgment interest in its determination of the benefit achieved was not arbitrary or capricious, but rather was the product of a logical and deductive reasoning process.

Difficulty and Complexity

The Court of Chancery carefully considered the difficulty and complexity of the case. It noted that the Plaintiff's attorneys had succeeded in presenting complex valuation issues in a persuasive way before a skeptical court:

They advanced a theory of the case that a judge of this court, me, was reluctant to embrace. I denied their motion for summary judgment. I think I gave [Plaintiff's counsel] a good amount of grief that day about the theory. I asked a lot of questions at trial because I was still skeptical of the theory. It faced some of the best lawyers I know and am privileged to have come before me, and they won....

I think when you talk about Sugarland and you talk about the difficulty of the litigation, was this difficult? Yes, it was. Were the defense counsel formidable and among the best that we have in our bar? They were. Did the plaintiffs have to do a lot of good work to get done and have to push back against a judge who was resistant to their approach? They did.

The Plaintiff's attorneys established at trial that Southern Peru had agreed to overpay its controlling shareholder by more than fifty percent ($3.7 billion compared to $2.4 billion). In doing so, the Court of Chancery found that the Plaintiff had to "deal with very complex financial and valuation issues" while being "up against major league, first-rate legal talent." This factor supports a substantial award of attorneys' fees.

Contingent Representation

The Plaintiff's attorneys pursued this case on a contingent fee basis. They invested a significant number of hours and incurred more than one million dollars in expenses. The Defendants litigated vigorously and forced the Plaintiff to go to trial to obtain any monetary recovery. Accordingly, in undertaking this representation, the Plaintiff's counsel incurred all of the classic contingent fee risks, including the ultimate risk — no recovery whatsoever. The Court of Chancery acknowledged that the fee award was "going to be a lot per hour to people who get paid by the hour," but that in this case, the Plaintiff's attorneys' compensation was never based on an hourly rate. Therefore, the Court of Chancery found that an award representing 15% of the common fund was reasonable in light of the absolute risk taken by Plaintiff's counsel in prosecuting the case through trial on a fully contingent fee basis.

Standing and Ability of Counsel

The Court of Chancery acknowledged that it was familiar with Plaintiff's counsel and had respect for their skills and record of success. The Defendants do not contest the skill, ability or reputation of the Plaintiff's counsel. They argue, however, that the Court of Chancery "should have weighed more heavily Plaintiff's counsel's undoubted ability against the causal manner in which this case was litigated." The record does not support that argument.

[1257] First, the Court of Chancery credited the Defendants' arguments that a rescission-based remedy was inappropriate because of the Plaintiff's delay in litigating the case. Second, the Court of Chancery noted that the record could justify a much larger award of attorneys' fees, but it ultimately applied a "conservative metric because of Plaintiff's delay." Accordingly, the record reflects that the Court of Chancery's Fee Award took into account the length of time involved in getting this case to trial.

Time and Effort of Counsel

The effort by the Plaintiff's attorneys was significant. The Plaintiff's attorneys reviewed approximately 282,046 pages in document production and traveled outside the United States to take multiple depositions. They also engaged in vigorously contested pretrial motion practice. They invested their firms' resources by incurring over a million dollars of out-of-pocket expenses. Most significantly, however, the Plaintiff's attorneys took this case to trial and prevailed. We repeat the Court of Chancery's statement: "anything that was achieved ... by this litigation [was] by [the Plaintiff's attorneys]."

The primary focus of the Defendants' challenge to the Court of Chancery's Fee Award is on the hourly rate that it implies, given that Plaintiff's counsel spent 8,597 hours on this case. They argue that the Court of Chancery abused its discretion by failing to consider the hourly rate implied by the Fee Award as a "backstop check" on the reasonableness of the fee. The Court of Chancery recognized the implications of this argument: "I get it. It's approximately — on what I awarded, approximately $35,000 an hour, if you look at it that way." However, the Court of Chancery did not look at it that way.

Sugarland does not require, as the Defendants argue, courts to use the hourly rate implied by a percentage fee award, rather than the benefit conferred, as the benchmark for determining a reasonable fee award. To the contrary, in Sugarland, this Court refused to adopt the Third Circuit's lodestar approach, which primarily focuses on the time spent.^[92] There, we summarized that methodology, as follows:

Under Lindy I, the Court's analysis must begin with a calculation of the number of hours to be credited to the attorney seeking compensation. The total hours multiplied by the approved hourly rate is the "lodestar" in the Third Circuit's formulation. It has, indeed, been said that the time approach is virtually the sole consideration in making a fee ruling under Lindy I.^[93]

In rejecting the lodestar methodology, we held the Court of Chancery judges "should not be obliged to make the kind of elaborate analyses called for by the several opinions in Lindy I and Lindy II."^[94]

Moreover, in Sugarland, this Court rejected an argument that was almost identical to the one the Defendants make in this case. There, the corporation asserted on appeal that in assessing the reasonableness of the fee the Court of Chancery should have given more weight to the plaintiffs' counsel's hours and hourly rate.^[95] This Court expressly rejected the use of time expended as the principal basis for determining fees awarded to plaintiff's counsel.^[96] Instead, we held that the [1258] benefit achieved by the litigation is the "common yardstick by which a plaintiff's counsel is compensated in a successful derivative action."^[97]

In applying that "common yardstick," we affirmed the Court of Chancery's determination that the plaintiffs' attorneys were "entitled to a fair percentage of the benefit inuring to Sugarland and its stockholders...."^[98] We also affirmed the Court of Chancery's determination that 20% of the benefit achieved was a reasonable award.^[99] Our only disagreement with the Court of Chancery in Sugarland was the "benefit" to which the percentage of 20% should be applied.^[100]

In this case, the Court of Chancery properly realized that "[m]ore important than hours is `effort, as in what Plaintiffs' counsel actually did.'"^[101] In applying Sugarland, the Court of Chancery understood that it had to look at the hours and effort expended, but recognized the general principle from Sugarland that the hours that counsel worked is of secondary importance to the benefit achieved.^[102] In this case, the Court of Chancery was aware of the hourly rate that its Fee Award implied and nonetheless properly concluded that, in accordance with Sugarland, the Plaintiff's attorneys were entitled to a fair percentage of the benefit, i.e., common fund. It then found that "an award of 15 percent of the revised judgment, inclusive of expenses... is appropriate."

The Defendants' alternative to their hourly argument is a challenge to the fairness of the percentage awarded by the Court of Chancery. The Defendants contend that the Court of Chancery erred by failing to apply a declining percentage analysis in its fee determination. According to the Defendants, this Court's decision in Goodrich v. E.F. Hutton Group, Inc.^[103] supports the per se use of a declining percentage. We disagree.

In Goodrich, we discussed the declining percentage of the fund concept, noting that the Court of Chancery rightly "acknowledged the merit of the emerging judicial consensus that the percentage of recovery awarded should `decrease as the size of the [common] fund increases.'"^[104] We also emphasized, however, that the multiple factor Sugarland approach to determining attorneys' fee awards remained adequate for purposes of applying the equitable common fund doctrine.^[105] Therefore, the use of a declining percentage, in applying the Sugarland factors in common fund cases, is a matter of discretion and is not required per se.

In this case, the record does not support the Defendants' argument that the Court of Chancery failed to apply a "declining percentage." In exercising its discretion and explaining the basis for the Fee Award, the Court of Chancery reduced the award from the 22.5% requested by the [1259] Plaintiff to 15% based, at least in part, on its consideration of the Defendants' argument that the percentage should be smaller in light of the size of the judgment:

Now, I gave a percentage of only 15 percent rather than 20 percent, 22 1/2 percent, or even 33 percent because the amount that's requested is large. I did take that into account. Maybe I am embracing what is a declining thing. I've tried to take into account all the factors, the delay, what was at stake, and what was reasonable. And I gave defendants credit for their arguments by going down to 15 percent. The only basis for some further reduction is, again, envy or there's just some level of too much, there's some natural existing limit on what lawyers as a class should get when they do a deal.^[106]

Thus, the record reflects that the Court of Chancery did reduce the percentage it awarded due to the large amount of the judgment. The Defendants are really arguing that the Fee Award percentage did not "decline" enough.

Fee Award Percentage Discretionary

In determining the amount of a reasonable fee award, our holding in Sugarland assigns the greatest weight to the benefit achieved in the litigation.^[107] When the benefit is quantifiable, as in this case, by the creation of a common fund, Sugarland calls for an award of attorneys' fees based upon a percentage of the benefit. The Sugarland factor that is given the greatest emphasis is the size of the fund created, because a "common fund is itself the measure of success ... [and] represents the benchmark from which a reasonable fee will be awarded."^[108]

Delaware case law supports a wide range of reasonable percentages for attorneys' fees, but 33% is "the very top of the range of percentages."^[109] The Court of Chancery has a history of awarding lower percentages of the benefit where cases have settled before trial.^[110] When a case settles early, the Court of Chancery tends to award 10-15% of the monetary benefit conferred.^[111] When a case settles after the plaintiffs have engaged in meaningful litigation efforts, typically including [1260] multiple depositions and some level of motion practice, fee awards in the Court of Chancery range from 15-25% of the monetary benefits conferred.^[112] "A study of recent Delaware fee awards finds that the average amount of fees awarded when derivative and class actions settle for both monetary and therapeutic consideration is approximately 23% of the monetary benefit conferred; the median is 25%."^[113] Higher percentages are warranted when cases progress to a post-trial adjudication.^[114]

The reasonableness of the percentage awarded by the Court of Chancery is reviewed for an abuse of discretion.^[115] The question presented in this case is how to properly determine a reasonable percentage for a fee award in a megafund case. A recent study by the economic consulting firm National Economic Research Associates ("NERA") demonstrates that overall as the settlement values increase, the amount of fee percentages and expenses decrease.^[116] The study reports that median attorneys' fees awarded from settlements in securities class actions are generally in the range of 22% to 30% of the recovery until the recovery approaches approximately $500 million.^[117] Once in the vicinity of over $500 million, the median attorneys' fees falls to 11%.^[118]

Appellate courts that have examined a "megafund rule" requiring a fee percentage to be capped at a low figure when the recovery is quite high, have rejected it as a blanket rule. It is now accepted that "[a] mechanical, a per se application of the [1261] `megafund rule' is not necessarily reasonable under the circumstances of a case."^[119] For example, although the Third Circuit recognized that its jurisprudence confirms the use of a sliding scale as "appropriate" for percentage fee awards in large recovery cases, it has held that trial judges are not required to use a declining percentage approach in every case involving a large settlement.^[120] The Third Circuit reasoned that it has "generally cautioned against overly formulaic approaches in assessing and determining the amounts and reasonableness of attorneys' fees," and that "the declining percentage concept does not trump the fact-intensive [In re] Prudential [Ins. Co. Am. Sales Litigation, 148 F.3d 283 (3d Cir.1998)]/Gunter [v. Ridgewood Energy Corp., 223 F.3d 190 (3d Cir.2000)] [factors,]"^[121] which are similar to this Court's Sugarland factors.

Although several courts have recognized the declining percentage principle, none have imposed it as a per se rule.^[122] In Goodrich, we held the Court of Chancery did not abuse its discretion by rejecting a "per se rule that awarded attorney's fees as a percentage in relation to the maximum common fund available, without regard to the benefits actually realized by class members."^[123] We reasoned that "[t]he adoption of a mandatory methodology or particular mathematical model for determining attorney's fees in common fund cases would be the antithesis of the equitable principles from which the concept of such awards originated."^[124] That ratio decidendi equally applies in this case.

Therefore, we decline to impose either a cap or the mandatory use of any particular range of percentages for determining attorneys' fees in megafund cases. As we stated in Goodrich, "[n]ew mechanical guidelines are neither appropriate nor needed for the Court of Chancery."^[125] We reaffirm that our holding in Sugarland sets forth the proper factors for determining attorneys' fee awards in all common fund cases.^[126]

Fee Award Reasonable Percentage

The percentage awarded as attorneys' fees from a common fund is committed to the sound discretion of the Court of Chancery.^[127] In determining the amount of a fee award, the Court of Chancery must consider the unique circumstances of each case. Its reasons for the selection of a given percentage must be stated with particularity.

The Court of Chancery quantified the Fee Award as 15% of the common fund.^[128] [1262] The Court of Chancery addressed the Sugarland factors and how those factors caused it to arrive at that percentage, as follows:

The plaintiffs here indisputably prosecuted this action through trial and secured an immense economic benefit for Southern Peru. I've already said — and I'm going to take into account — I already encouraged the plaintiffs to be conservative in their application because they weren't as rapid in moving this as I would have liked. I don't think, though, that you can sort of ignore them, to say because they didn't invest six years on this case on an entirely contingent basis, deal with very complex financial and valuation issues, and ignore the fact that they were up against major league, first-rate legal talent.

. . . .

"[O]ne of the things ... the defendants got credit for in this case is that the plaintiffs were slow.... I also took that into account in how I approach interest in the case.... [I] also ... have to take that into account in the percentage I award for the plaintiffs[,] ... [a]nd I took that into account. I took some cap factors into account, setting the interest in what I did.... I have to take some away from the plaintiff's ... lawyers on that ... frankly, there were grounds for me to award more to the company. And I didn't. And — and so that is going to impel me to reduce the percentage that I'm awarding....^[129]

We repeat the Court of Chancery's conclusion:

Now, I gave a percentage of only 15 percent rather than 20 percent, 22 1/2 percent, or even 33 percent because the amount that's requested is large. I did take that into account. Maybe I am embracing what is a declining thing. I've tried to take into account all the factors, the delay, what was at stake, and what was reasonable. And I gave defendants credit for their arguments by going down to 15 percent. The only basis for some further reduction is, again, envy or there's just some level of too much, there's some natural existing limit on what lawyers as a class should get when they do a deal.

We review an award of attorneys' fees for an abuse of discretion.^[130] When an act of judicial discretion is under appellate review, this Court may not substitute its notions of what is right for those of the trial judge, if his or her judgment was the product of reason and conscience, as opposed to being either arbitrary or capricious.^[131] As we recently stated, the challenge of quantifying fee awards is entrusted to the trial judge and will not be disturbed on appeal in the absence of capriciousness or factual findings that are clearly wrong.^[132]

In this case, the Court of Chancery carefully weighed and considered all of the Sugarland factors. The record supports its factual findings and its well-reasoned decision that a reasonable attorneys' fee is 15% of the benefit created. Accordingly, we hold that the Fee Award was a proper exercise of the Court of Chancery's broad discretion in applying the Sugarland factors under the circumstances of this case.

Conclusion

The judgment of the Court of Chancery, awarding more than $2 billion in damages [1263] and more than $304 million in attorneys' fees, is affirmed.

BERGER, Justice, concurring and dissenting:

I concur in the majority's decision on the merits, but I would find that the trial court did not properly apply the law when it awarded attorneys' fees, and respectfully dissent on that issue.

The majority finds no abuse of discretion in the trial court's decision to award more than $304 million in attorneys' fees. The majority says that the trial court applied the settled standards set forth in Sugarland Industries, Inc. v. Thomas,^[133] and that this Court may not substitute its notions of what is right for those of the trial court. But the trial court did not apply Sugarland, it applied its own world views on incentives, bankers' compensation, and envy.

To be sure, the trial court recited the Sugarland standards. Its analysis, however, focused on the perceived need to incentivize plaintiffs' lawyers to take cases to trial. The trial court hypothesized that a stockholder plaintiff would be happy with a lawyer who says, "If you get really rich because of me, I want to get rich, too."^[134] Then, the trial court talked about how others get big payouts without comment, but that lawyers are not viewed the same way:

[T]here's an idea that when a lawyer or law firms are going to get a big payment, that there's something somehow wrong about that, just because it's a lawyer. I'm sorry, but investment banks have hit it big.... They've hit it big many times. And to me, envy is not an appropriate motivation to take into account when you set an attorney fee.^[135]

The trial court opined that a declining percentage for "mega" cases would not create a healthy incentive system, and that the trial court would not embrace such an approach. Rather, the trial court repeatedly pointed out that "plenty of market participants make big fees when their clients win," and that if this were a hedge fund manager or an investment bank, the fee would be okay.^[136] In sum, the trial court said that the fundamental test for reasonableness is whether the fee is setting a good incentive, and that the only basis for reducing the fee would be envy.^[137] That is not a decision based on Sugarland.

Reargument Unanimously Denied

The appellants, Americas Mining Corporation ("AMC") and nominal defendant, Southern Copper Corporation, have filed a motion for reargument. The issue raised on reargument is the narrow question of whether the relevant "benefit achieved" for calculating attorneys' fees in a derivative case, against a majority stockholder and other defendants, is properly defined as the entire judgment paid to the corporation, or, in this case, 19% of the entire judgment paid to the corporation, because the majority stockholder defendant owns 81% of the corporation that will receive the judgment.

This Court has carefully considered the motion for reargument filed by the Defendants, and the response filed by the Plaintiff. We have determined that the motion for reargument is procedurally barred under [1264] Delaware law, because the issue raised on reargument was not fully and fairly presented in the Defendants' opening briefs;^[138] and alternatively, because it is substantively without merit, as a matter of Delaware law.^[139]

Waiver Constitutes Procedural Bar

This Court's rules specifically require an appellant to set forth the issues raised on appeal and to fairly present an argument in support of those issues in their opening brief. If an appellant fails to comply with these requirements on a particular issue, the appellant has abandoned that issue on appeal.^[140] Supreme Court Rule 14(b)(vi)(A)(3) states that "[t]he merits of any argument that is not raised in the body of the opening brief shall be deemed waived and will not be considered by the Court on appeal."

Neither of the Defendants' opening briefs properly raised the issue set forth in the limited motion for reargument. AMC's opening brief did not mention the issue at all and Southern Copper Corporation's opening brief only mentioned the issue indirectly in a footnote. Arguments in footnotes do not constitute raising an issue in the "body" of the opening brief.^[141]

Therefore, the issue raised in the limited motion for reargument is procedurally barred, as a matter of Delaware law, because it has been waived. On that basis alone the motion must be denied.^[142]

Argument Without Substantive Merit

Alternatively, and as an independent basis for denying the limited motion for reargument, we conclude that the Court of Chancery properly rejected the "look through" approach to awarding attorneys' fees in a derivative action. The derivative suit has been characterized as "one of the most interesting and ingenious of accountability mechanisms for large formal organizations."^[143] It enables a stockholder to bring suit on behalf of the corporation for harm done to the corporation.^[144]

Because a derivative suit is being brought on behalf of the corporation, any recovery must go to the corporation.^[145] In addition, a stockholder who is directly injured retains the right to bring an individual action for those injuries affecting his or her legal rights as a stockholder.^[146] Such an individual injury is distinct from an injury to the corporation alone. "In such individual suits, the recovery or other relief flows directly to the stockholders, not to the corporation."^[147]

[1265] In Tooley v. Donaldson, Lufkin, & Jenrette, Inc., this Court held that whether a claim is derivative or direct depends solely upon two questions: "(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?"^[148] It is undisputed that this is a derivative proceeding. In this case, the corporation was harmed and the total recovery is awarded to the corporation, Southern Copper Corporation — not "nominally" but actually.

In assessing the "benefit achieved," the Court of Chancery held, and this Court affirmed, that the benefit achieved in a derivative action is the benefit to the corporation. The "look through" approach to awarding attorneys' fees in a derivative case was properly rejected by the Court of Chancery long ago in Wilderman v. Wilderman.^[149] Similarly, in rejecting the Defendants' "look-through" argument in this derivative action, the Court of Chancery stated:

There's also this argument that I should only award — I should basically look at it like it's a class action case and that the benefit is only to the minority stockholders. I don't believe that's our law. And this is a corporate right. And, you know, if you look going back to 1974 ... there was Wilderman versus Wilderman, 328 A.2d 456, which talks about not disregarding the corporate form in a derivative action and looking at the benefit to the corporation, to the more recent Carlton — Carlson case, which is now reported, in 925 A.2d 506 does the same.

No stockholder, including the majority stockholder, has a claim to any particular assets of the corporation.^[150] Accordingly, Delaware law does not analyze the "benefit achieved" for the corporation in a derivative action, against a majority stockholder and others, as if it were a class action recovery for minority stockholders only. Therefore, the limited motion for reargument is substantively without merit. On that alternative basis alone the motion must also be denied.^[151]

Now, therefore, this 21st day of September 2012, it is hereby ordered that the motion for reargument is unanimously denied.

[1] Sitting by designation pursuant to Del. Const. art. IV, § 12 and Supr. Ct. R. 2 and 4.

[2] The facts are taken almost verbatim from the post-trial decision by the Court of Chancery.

[3] On October 11, 2005, Southern Peru changed its name to "Southern Copper Corporation" and is currently traded on the NYSE under the symbol "SCCO."

[4] Grupo Mexico held — and still holds — its interest in Southern Peru through its wholly-owned subsidiary Americas Mining Corporation ("AMC"). Grupo Mexico also held its 99.15% stake in Minera through AMC. AMC, not Grupo Mexico, is a defendant to this action, but I refer to them collectively as Grupo Mexico in this opinion because that more accurately reflects the story as it happened.

[5] The remaining plaintiff in this action is Michael Theriault, as trustee of and for the Theriault Trust.

[6] These individual defendants are Germán Larrea Mota-Velasco, Genaro Larrea Mota-Velasco, Oscar González Rocha, Emilio Carrillo Gamboa, Jaime Fernandez Collazo Gonzalez, Xavier García de Quevedo Topete, Armando Ortega Gómez, and Juan Rebolledo Gout.

[7] At this point in the negotiation process, Grupo Mexico mistakenly believed that it only owned 98.84% of Minera. It later corrects this error, and the final Merger consideration reflected Grupo Mexico's full 99.15% equity ownership stake in Minera.

[8] Tr. at 159 (Handelsman) ("I think the committee was somewhat comforted by the fact that the DCF analysis of Minera [] and the DCF analysis of [Southern Peru] were not as different as the discounted cash flow analysis of Minera [] and the market value of Southern Peru.").

[9] During discovery, two Microsoft Excel worksheets were unearthed that appear to suggest the implied equity values of Minera and Southern Peru that underlie Goldman's October 21 presentation. One worksheet, which contains the Minera model, indicates an implied equity value for Minera of $1.25 billion using a long-term copper price of $0.90/lb and a discount rate of 8.5%. The other worksheet, which contains the Southern Peru model, indicates an implied equity value for Southern Peru of $1.6 billion using a copper price of $0.90 and a discount rate of 9.0%, and assuming a royalty tax of 2%. Both the Plaintiff's expert and the Defendants' expert relied on the projections contained in these worksheets in their reports. The Defendants have also not contested the Plaintiff's expert's contention that these worksheets include Goldman's discounted cash flow estimates as of October 21, 2004.

[10] Barrow v. Abramowicz, 931 A.2d 424, 429 (Del.2007); Sammons v. Doctors for Emergency Servs., P.A., 913 A.2d 519, 528 (Del.2006).

[11] Sammons v. Doctors for Emergency Servs., P.A., 913 A.2d at 528.

[12] Id.

[13] Drejka v. Hitchens Tire Serv., Inc., 15 A.3d 1221, 1223-24 (Del.2010).

[14] Sheehan v. Oblates of St. Francis de Sales, 15 A.3d 1247, 1253 (Del.2011).

[15] Drejka v. Hitchens Tire Serv., Inc., 15 A.3d at 1222-24.

[16] Sammons v. Doctors for Emergency Servs., P.A., 913 A.2d at 528.

[17] Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997); Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del.1983); see also Rosenblatt v. Getty Oil Co., 493 A.2d 929, 937 (Del.1985).

[18] See Emerald Partners v. Berlin, 726 A.2d 1215, 1221 (Del. 1999); Kahn v. Tremont Corp., 694 A.2d at 428-29.

[19] Weinberger v. UOP, Inc., 457 A.2d at 711.

[20] Id.

[21] Id. (citations omitted).

[22] Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110 (Del.1994).

[23] See id. at 1117 (citation omitted).

[24] Id.

[25] Kahn v. Tremont Corp., 694 A.2d at 428 (citation omitted).

[26] Emerald Partners v. Berlin, 787 A.2d 85 (Del.2001).

[27] Id. at 98-99.

[28] See Emerald Partners v. Berlin, 726 A.2d 1215, 1222-23 (Del. 1999) (describing that the special committee must exert "real bargaining power" in order for defendants to obtain a burden shift); see also Beam v. Stewart, 845 A.2d 1040, 1055 n. 45 (Del.2004) (noting that the test articulated in Tremont requires a determination as to whether the committee members "in fact" functioned independently (citing Kahn v. Tremont Corp., 694 A.2d 422, 429-30 (Del. 1997))).

[29] Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997).

[30] Id. at 429 (citation omitted).

[31] Id. (citation omitted).

[32] Id. at 428.

[33] Accord Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d at 1121 ("[U]nless the controlling or dominating shareholder can demonstrate that it has not only formed an independent committee but also replicated a process `as though each of the contending parties had in fact exerted its bargaining power at arm's length,' the burden of proving entire fairness will not shift." (citing Weinberger v. UOP, Inc., 457 A.2d 701, 709-10 n. 7 (Del.1983))).

[34] Cf. In re Cysive, Inc. S'holders Litig., 836 A.2d 531, 549 (Del.Ch.2003).

[35] See William T. Allen et al., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. L. 1287, 1303-04 n. 63 (2001) (noting the practical problems litigants face when the burden of proof they are forced to bear is not made clear until after the trial); cf. In re Cysive, Inc. S'holders Litig., 836 A.2d at 549.

[36] Kahn v. Tremont Corp., 694 A.2d at 428 (citing Weinberger v. UOP, Inc., 457 A.2d at 710). See also In re Cox Commc'ns, Inc. S'holders Litig., 879 A.2d 604, 617 (Del.Ch. 2005) ("All in all, it is perhaps fairest and more sensible to read Lynch as being premised on a sincere concern that mergers with controlling stockholders involve an extraordinary potential for the exploitation by powerful insiders of their informational advantages and their voting clout.").

[37] William T. Allen et al., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. L. 1287, 1303-04 n. 63 (2001).

[38] In re Cysive, Inc. S'holders Litig., 836 A.2d at 549.

[39] Kahn v. Tremont Corp., 694 A.2d at 428-29.

[40] In re Cox Commc'ns, Inc. S'holders Litig., 879 A.2d at 617 (emphasis added).

[41] In re Cysive, Inc. S'holders Litig., 836 A.2d at 548.

[42] Kahn v. Tremont Corp., 694 A.2d at 428.

[43] Emerald Partners v. Berlin, 787 A.2d 85, 99 (Del.2001).

[44] See, e.g., In re Cysive, Inc. S'holders Litig., 836 A.2d at 548 ("Because these devices are thought, however, to be useful and to incline transactions towards fairness, the Lynch doctrine encourages them by giving defendants the benefits of a burden shift if either one of the devices is employed.").

[45] See William T. Allen et al., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. L. 1287, 1297 (2001) (explaining that standards of review should be functional, in that they should serve as a "useful tool that aids the court in deciding the fiduciary duty issue" rather than merely "signal the result or outcome").

[46] See In re Cysive, Inc. S'holders Litig., 836 A.2d at 549 (noting that it is inefficient for defendants to seek a pretrial ruling on the burden-shift unless the discovery process has generated a sufficient factual record to make such a determination).

[47] See, e.g., Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985); Weinberger v. UOP, Inc., 457 A.2d at 709 n. 7.

[48] Weinberger v. UOP, Inc., 457 A.2d at 709 n. 7.

[49] Id. at 712, 714.

[50] Id. at 711.

[51] Id.

[52] See, e.g., Valeant Pharms. Int'l v. Jerney, 921 A.2d 732, 746 (Del.Ch.2007).

[53] Weinberger v. UOP, Inc., 457 A.2d at 711.

[54] Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1179 (Del. 1995); Nixon v. Blackwell, 626 A.2d 1366, 1373, 1378 (Del. 1993); accord Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d at 1120.

[55] See Nixon v. Blackwell, 626 A.2d at 1373.

[56] Cinerama, Inc. v. Technicolor, Inc., 663 A.2d at 1180; Rosenblatt v. Getty Oil Co., 493 A.2d at 937.

[57] Cinerama, Inc. v. Technicolor, Inc., 663 A.2d at 1180.

[58] Id.

[59] Ryan v. Tad's Enters., Inc., 709 A.2d 682, 699 (Del.Ch.1996).

[60] Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 855 A.2d 1059, 1072 (Del.Ch. 2003).

[61] (citations omitted).

[62] $55.89 closing price × 67,200,000 = $3,755,808,000.

[63] $3.756 billion-$2.409 billion = $1.347 billion.

[64] Weinberger v. UOP, Inc., 457 A.2d at 714; see also Glanding v. Industrial Trust Co., 45 A.2d 553, 555 (Del. 1945) ("[T]he Court of Chancery of the State of Delaware inherited its equity jurisdiction from the English Courts."); 1 Victor B. Woolley, Woolley on Delaware Practice § 56 (1906).

[65] Int'l Telecharge, Inc. v. Bomarko, Inc., 766 A.2d 437, 440 (Del.2000).

[66] Id. at 441.

[67] Summa Corp. v. Trans World Airlines, Inc., 540 A.2d 403, 409 (Del. 1988).

[68] Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del.1980).

[69] This argument is without merit. Rule 1.5(c) of the Rules of Professional Conduct expressly contemplates fees that are based on a percentage. Comment [3] to the Rule provides that the determination of whether a particular contingent fee is reasonable is to be based on the relevant factors and applicable law. In this case, the Court of Chancery made that reasonableness determination based on the relevant factors and applicable law set forth in Sugarland by this Court.

[70] Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 100 S.Ct. 745, 62 L.Ed.2d 676 (1980) (citations omitted). See also Goodrich v. E.F. Hutton Group, Inc., 681 A.2d 1039, 1049 (Del. 1996) ("[T]he condition precedent to invoking the common fund doctrine is a demonstration that a common benefit has been conferred.").

[71] Goodrich v. E.F. Hutton Group, Inc., 681 A.2d at 1044 (citations omitted).

[72] Id. (citing Boeing Co. v. Van Gemert, 444 U.S. at 478, 100 S.Ct. 745; Maurer v. Int'l Re-Insurance Corp., 95 A.2d 827, 830 (Del.1953)).

[73] Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1164-65 (Del. 1989) (citing CM & M Group, Inc. v. Carroll, 453 A.2d 788, 795 (Del.1982)).

[74] Goodrich v. E.F. Hutton Group, Inc., 681 A.2d at 1045 (citing Weinberger v. UOP, Inc., 517 A.2d 653, 654-55 (Del.Ch.1986); Chrysler Corp. v. Dann, 223 A.2d 384, 386 (Del. 1966)).

[75] See Goodrich v. E.F. Hutton Group, Inc., 681 A.2d at 1046-47; Federal Judicial Center, MANUAL FOR COMPLEX LITIGATION (FOURTH) § 14.121 at 187 (2004).

[76] See Goodrich v. E.F. Hutton Group, Inc., 681 A.2d at 1046.

[77] Id. (citations omitted).

[78] Cent. R.R. & Banking Co. v. Pettus, 113 U.S. 116, 124-25, 5 S.Ct. 387, 28 L.Ed. 915 (1885); Trustees v. Greenough, 105 U.S. 527, 532-33, 26 L.Ed. 1157 (1881). See also Goodrich v. E.F. Hutton Group, Inc., 681 A.2d at 1046-47 (discussing history of common fund fee awards).

[79] Goodrich v. E.F. Hutton Group, Inc., 681 A.2d at 1046-47 (citing Lindy Bros. Builders, Inc. of Phila. v. Am. Radiator & Standard Sanitary Corp., 487 F.2d 161, 167-68 (3d Cir. 1973)).

[80] Blum v. Stenson, 465 U.S. 886, 900 n. 16, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984).

[81] Shaw v. Toshiba Am. Info. Sys., Inc., 91 F.Supp.2d 942, 962-63 (E.D.Tex.2000) (internal quotation marks omitted).

[82] Report of the Third Circuit Task Force, Court Awarded Attorney Fees, 108 F.R.D. 237, 255 (1985).

[83] Id. at 246-50.

[84] Seinfeld v. Coker, 847 A.2d 330, 335 (Del. Ch.2000) (citing In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litig., 55 F.3d 768, 821 (3d Cir.1995)).

[85] Federal Judicial Center, MANUAL FOR COMPLEX LITIGATION (FOURTH) § 14.121 at 187 (2004); Charles W. "Rocky" Rhodes, Attorneys' Fees in Common-Fund Class Actions: A View from the Federal Circuits, 35 The Advocate (Tex.) 56, 57-58 (2006).

[86] Sugarland Indus., Inc. v. Thomas, 420 A.2d at 149-50.

[87] Id. at 150

[88] Id. at 149. See also Loral Space & Commc'ns, Inc. v. Highland Crusader Offshore Partners, L.P., 977 A.2d 867, 870 (Del.2009).

[89] See, e.g., Julian v. E. States Const. Serv., Inc., 2009 WL 154432, at *2 (Del.Ch. Jan. 14, 2009) ("In determining the size of an award, courts assign the greatest weight to the benefit achieved in the litigation.") (citing Franklin Balance Sheet Inv. Fund v. Crowley, 2007 WL 2495018, at *8 (Del.Ch. Aug. 30, 2007)); Seinfeld v. Coker, 847 A.2d 330, 336 (Del.Ch.2000) ("Sugarland's first factor is indeed its most important-the results accomplished for the benefit of the shareholders.") (citations omitted); Dickerson v. Castle, 1992 WL 205796, at *1 (Del.Ch. Aug. 21, 1992) ("Typically, the benefit achieved by the action is accorded the greatest weight.") (citations omitted), aff'd 1993 WL 66586 (Del. Mar. 2, 1993); In re Anderson Clayton S'holders Litig., 1988 WL 97480, at *3 (Del.Ch. Sept. 19, 1988) ("This Court has traditionally placed greatest weight upon the benefits achieved by the litigation."); In re Maxxam Group, Inc., 1987 WL 10016, at *11 (Del.Ch. Apr. 16, 1987) ("The benefits achieved by the litigation constitute the factor generally accorded the greatest weight.").

[90] Johnston v. Arbitrium (Cayman Islands) Handels AG, 720 A.2d 542, 547 (Del.1998).

[91] Cf. In re Cox Commc'ns, Inc. S'holders Litig., 879 A.2d at 609-12 (awarding a "substantially smaller [attorney] fee" than that requested by plaintiffs for settlement of claims challenging a fully negotiable merger proposal where no appreciable risk was taken and credit was "shared" with special committee).

[92] Sugarland Indus., Inc. v. Thomas, 420 A.2d at 150.

[93] Id.

[94] Id.

[95] Id. at 149-50.

[96] Id. at 150.

[97] Id. at 147. See Irving Morris and Kevin Gross, Attorneys' Fee Applications In Common Fund Cases Under Delaware Law: Benefit Achieved as "The Common Yardstick." 324 PLI/Lit 167 (1987).

[98] Sugarland Indus., Inc. v. Thomas, 420 A.2d at 150 (emphasis added).

[99] Id. at 151.

[100] Id. at 150-51.

[101] In re Del Monte Foods Co. S'holders Litig., 2011 WL 2535256, at *13 (Del.Ch. June 27, 2011) (citation omitted).

[102] Sugarland Indus., Inc. v. Thomas, 420 A.2d at 147.

[103] Goodrich v. E.F. Hutton Group, Inc., 681 A.2d 1039 (Del. 1996).

[104] Id. at 1048 (citations omitted).

[105] Id. at 1050.

[106] Emphasis added.

[107] See Sugarland Indus., Inc. v. Thomas, 420 A.2d at 149-50.

[108] 4 Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 14:6, at 547, 550 (4th ed.2001). See Irving Morris & Kevin Gross, Attorneys' Fee Applications In Common-Fund Cases Under Delaware Law: Benefit Achieved as "The Common Yardstick," 324 PLI/Lit 167, 175 (1987).

[109] In re Emerson Radio S'holder Deriv. Litig., 2011 WL 1135006, at *3 (Del.Ch. Mar. 28, 2011) (citing Thorpe v. CERBCO, 1997 WL 67833 at *6 (Del.Ch. Feb. 6, 1997)).

[110] Franklin Balance Sheet Inv. Fund v. Crowley, 2007 WL 2495018, at *13 (Del.Ch. Aug. 30, 2007).

[111] In re Emerson Radio S'holder Deriv. Litig., 2011 WL 1135006, at *3 n. 2 (citing Julian v. E. States Constr. Serv., Inc., 2009 WL 154432 (Del.Ch. Jan. 14, 2009) (awarding total of 8% when little time and effort were invested before settlement); Korn v. New Castle Cty., 2007 WL 2981939 (Del.Ch. Oct. 3, 2007) (awarding 10% when "there was limited discovery, no briefing, and no oral argument...."); Seinfeld v. Coker, 847 A.2d 330 (Del.Ch.2000) (awarding 10% when case settled after limited document discovery and no motion practice); In re The Coleman Co. S'holders Litig., 750 A.2d 1202 (Del.Ch.1999) (awarding 10% where counsel did not take a single deposition or file or defend a pretrial motion); In re Josephson Int'l, Inc., 1988 WL 112909 (Del.Ch. Oct. 19, 1988) (awarding 18% when case settled after ten days of document discovery); Schreiber v. Hadson Petroleum Corp., 1986 WL 12169 (Del.Ch. Oct. 29, 1986) (awarding 16% when case settled "[s]hortly after suit was filed")).

[112] In re Emerson Radio S'holder Deriv. Litig., 2011 WL 1135006, at *3 & n. 3 (citing In re Cablevision/Rainbow Media Gp. Tracking Stock Litig., 2009 WL 1514925 (Del.Ch. May 22, 2009) (awarding 22.5% where plaintiffs' counsel devoted nearly 5,000 hours to the case); Gelobter v. Bressler, 1991 WL 236226 (Del.Ch. Nov. 6, 1991) (awarding 16.67% where counsel pursued extensive discovery, including seventeen depositions); Stepak v. Ross, 1985 WL 21137 (Del.Ch. Sept. 5, 1985) (awarding 20% where plaintiff took extensive discovery)).

[113] See Richard A. Rosen, David C. McBride & Danielle Gibbs, Settlement Agreements in Commercial Disputes: Negotiating, Drafting and Enforcement, § 27.10, at 27-100 (2010).

[114] In re Emerson Radio S'holder Deriv. Litig., 2011 WL 1135006, at *3 & n. 4 (citing Berger v. Pubco Corp., 2010 WL 2573881 (Del.Ch. June 23, 2010) (awarding a total fee of 31.5% where "lengthy and thorough litigation by counsel ... resulted in a final judgment and not a quick settlement"); Gatz v. Ponsoldt, 2009 WL 1743760 (Del.Ch. June 12, 2009) (awarding 33% in case litigated extensively, including through an appeal in the Delaware Supreme Court); Ryan v. Gifford, 2009 WL 18143 (Del.Ch. Jan. 2, 2009) (awarding 33% of cash amount where plaintiffs' counsel engaged in "meaningful discovery," survived "significant, hard fought motion practice" and incurred nearly $400,000 in expenses); Tuckman v. Aerosonic Corp., 1983 WL 20291 (Del.Ch. Apr. 21, 1983) (awarding 29% where litigated through trial and two appeals)).

[115] See Sugarland Indus., Inc. v. Thomas, 420 A.2d at 149.

[116] See Dr. Renzo Comolli et al., Recent Trends in Securities Class Action Litigation: 2012 Mid-Year Review, NERA Econ. Consulting, July 2012, at p. 31. For an example, the study finds fee awards in securities class actions amount to 27% in cases where the settlement is between $25 million and $100 million, 22.4% in cases where the settlement is between $100 million and $500 million, and 11.1% in cases where the settlement is above $500 million. Id. Figure 31. See also Federal Judicial Center, MANUAL FOR COMPLEX LITIGATION § 14.121 at 187 (2004) ("Attorney fees awarded under the percentage method are often between 25% and 30% of the fund.").

[117] Dr. Renzo Comolli et al., Recent Trends in Securities Class Action Litigation: 2012 Mid-Year Review, NERA Econ. Consulting, July 2012, at p. 31.

[118] Id.

[119] In re Enron Corp. Sec., Deriv. & ERISA Litig., 586 F.Supp.2d 732, 753-54 (S.D.Tex. 2008) (citing cases and concluding that "[a] mechanical, a per se application of the `megafund rule' is not necessarily reasonable under the circumstances of a case.").

[120] In re Rite Aid Corp. Sec. Litig., 396 F.3d 294, 302-03 (3d Cir.2005) ("[T]here is no rule that a district court must apply a declining percentage reduction in every settlement involving a sizable fund.").

[121] Id. at 303.

[122] Id. at 302-03 (3d Cir.2005).

[123] Goodrich v. E.F. Hutton Group, Inc., 681 A.2d at 1049.

[124] Id. at 1050.

[125] Id.

[126] Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del.1980).

[127] Chrysler Corp. v. Dann, 223 A.2d 384, 386 (Del.1966).

[128] See Shaw v. Toshiba Am. Info. Sys., Inc., 91 F.Supp.2d 942 (E.D.Tex.2000) (awarding 15% fee on a common fund of $1 billion); In re NASDAQ Market-Makers Antitrust Litig., 187 F.R.D. 465 (S.D.N.Y.1998) (awarding 14% fee on common fund of $1 billion).

[129] Emphasis added.

[130] Sugarland Indus., Inc. v. Thomas, 420 A.2d at 149.

[131] Chavin v. Cope, 243 A.2d 694, 695 (Del. 1968).

[132] EMAK Worldwide, Inc. v. Kurz, 50 A.3d 429, 432-33, 2012 WL 1319771, at *3 (Del. Ch. Apr. 17, 2012).

[133] Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del.1980).

[134] Appellant Southern Copper Corporation's Opening Brief, Exhibit A at 74.

[135] Id. at 82.

[136] Id. at 81-83.

[137] Id. at 83-84.

[138] Flamer v. State, 953 A.2d 130, 134 (Del. 2008); Roca v. E.I. du Pont de Nemours & Co., 842 A.2d 1238, 1242 (Del.2004).

[139] Wilderman v. Wilderman, 328 A.2d 456, 458 (Del.Ch. 1974). See Gentile v. Rossette, 906 A.2d 91, 102-03 (Del.2006); Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del.2004).

[140] Roca v. E.I. du Pont de Nemours & Co., 842 A.2d at 1242.

[141] See Supreme Court Rule 14(d) ("Footnotes shall not be used for argument ordinarily included in the body of a brief....").

[142] Michigan v. Long, 463 U.S. 1032, 1044, 103 S.Ct. 3469, 77 L.Ed.2d 1201 (1983).

[143] Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 351 (Del.1988) (quoting R. Clark, Corporate Law 639-40 (1986)).

[144] Kramer v. W. Pac. Indus., Inc., 546 A.2d at 351.

[145] Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d at 1036.

[146] Id.

[147] Id.

[148] Id. at 1033.

[149] Wilderman v. Wilderman, 328 A.2d at 458.

[150] Norte & Co. v. Manor Healthcare Corp., 1985 WL 44684, at *3 (Del.Ch.) ("[T]he corporation is the legal owner of its property and the stockholders do not have any specific interest in the assets of the corporation.").

[151] Michigan v. Long, 463 U.S. at 1044, 103 S.Ct. 3469.

5.2.3 Court Scrutiny of Settlement 5.2.3 Court Scrutiny of Settlement

Settlements of class and derivative actions require court approval under Del. Ch. Rules 23(e) and 23.1(c), respectively. In the 2015 Riverbed opinion, Vice-Chancellor Glasscock explained the rationale for this requirement in the context of a class action:

Settlements in class actions present a well-known agency problem: A plaintiff’s attorney may favor a quick settlement where the additional effort required to fully develop valuable claims on behalf of the class may not generate an additional fee as lucrative to the plaintiff’s attorney as accepting a quick and moderate fee, then pursuing other interests. The interest of the principal—the individual plaintiff/stockholder—is often so small that it serves as scant check on the perverse incentive described above, notwithstanding that the aggregate interest of the class in pursuing litigation may be great—the very problem that makes class litigation appropriate in the first instance.

—In re Riverbed Tech., Inc. S’holders Litig., 2015 WL 5458041, at *7 (Del. Ch. Sept. 17, 2015).

In particular, as class representatives, plaintiff attorneys have the power to forfeit claims on behalf of the entire class in a settlement. Plaintiff attorneys are thus in a position to “sell” shareholder claims—possibly below value but keeping the “price” (fees) for themselves:

In combination, the incentives of the litigants may be inimical to the class: the individual plaintiff may have little actual stake in the outcome, her counsel may rationally believe a quick settlement and modest fee is in his best financial interest, and the defendants may be happy to “purchase,” at the bargain price of disclosures of marginal benefit to the class and payment of the plaintiffs’ attorney fees, a broad release from liability.

—Id., at *9.

In spite of these concerns, Delaware courts long approved settlements containing broad releases of shareholder claims in return for moderate corporate disclosures and six-figure attorney fees. This spurred a practice that Chancellor Bouchard described in the seminal Trulia opinion:

Today, the public announcement of virtually every transaction involving the acquisition of a public corporation provokes a flurry of class action lawsuits alleging that the target’s directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. On occasion, although it is relatively infrequent, such litigation has generated meaningful economic benefits for stockholders when, for example, the integrity of a sales process has been corrupted by conflicts of interest on the part of corporate fiduciaries or their advisors.¹⁷ But far too often [892] such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.

In such lawsuits, plaintiffs’ leverage is the threat of an injunction to prevent a transaction from closing. Faced with that threat, defendants are incentivized to settle quickly in order to mitigate the considerable expense of litigation and the distraction it entails, to achieve closing certainty, and to obtain broad releases as a form of “deal insurance.” These incentives are so potent that many defendants self-expedite the litigation by volunteering to produce “core documents” to plaintiffs’ counsel, obviating the need for plaintiffs to seek the Court’s permission to expedite the proceedings in aid of a preliminary injunction application and thereby avoiding the only gating mechanism (albeit one friendly to plaintiffs¹⁸) the Court has to screen out frivolous cases and to ensure that its limited resources are used wisely.

Once the litigation is on an expedited track and the prospect of an injunction hearing looms, the most common currency used to procure a settlement is the issuance of supplemental disclosures to the target’s stockholders before they are asked to vote on the proposed transaction. The theory behind making these disclosures is that, by having the additional information, stockholders will be better informed when exercising their franchise rights. Given the Court’s historical practice of approving disclosure settlements when the additional information is not material, and indeed may be of only minor value to the stockholders, providing supplemental disclosures is a particularly easy “give” for defendants to make in exchange for a release.

Once an agreement-in-principle is struck to settle for supplemental disclosures, the litigation takes on an entirely different, non-adversarial character. Both sides of the caption then share the same interest in obtaining the Court’s approval of the settlement. The next step, after notice has been provided to the stockholders, is a hearing in which the Court must evaluate the fairness of the proposed settlement. Significantly, in advance of such hearings, the Court receives briefs and affidavits from plaintiffs extolling the value of the supplemental disclosures and advocating for approval of the proposed settlement, but rarely receives any submissions expressing an opposing viewpoint.

—In re Trulia, Inc. S’holders Litig., 129 A.3d 884, 891-3 (Del Ch. 2016).

Notice that Chancellor Bouchard does not mention any submissions from defendants in the fairness hearing. That is because the defendants, too, wanted to settle the lawsuit—and obtain the release! In essence, there had developed a practice—or at least a perception of a practice—where defendants and certain plaintiff attorneys colluded at the expense of shareholders at large: the plaintiff attorney got a fee and defendants got a broad release, while shareholders lost potentially valuable claims in return for useless disclosures. Chancellor Bouchard essentially put an end to this practice in Delaware with the following announcement:

Based on these considerations, this opinion offers the Court’s perspective that disclosure claims arising in deal litigation optimally should be adjudicated outside of the context of a proposed settlement so that the Court’s consideration of the merits of the disclosure claims can occur in an adversarial process without the defendants’ desire to obtain an often overly broad release hanging in the balance. The opinion further explains that, to the extent that litigants continue to pursue disclosure settlements, they can expect that the Court will be increasingly vigilant in scrutinizing the “give” and the “get” of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.

—Id., at 887.

Predictably, plaintiff attorneys then attempted to sue in other fora, namely federal courts or other states’ courts (e.g., where the corporation is headquartered), while corporations attempted to cut off such attempts through forum selection clauses (cf. DGCL 115).

17 Some examples of adjudicated cases of this type arising from acquisitions of public corporations include: In re Rural/Metro Corp. S’holders Litig., 102 A.3d 205, 263 (Del. Ch.2014) (finding after trial that class suffered damages of $91 million, of which the board’s financial advisor was liable for 83%, based on aiding and abetting fiduciary breaches in sale of corporation), aff’d sub nom. RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 2015 WL 7721882 (Del. Nov. 30, 2015); In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *47 (Del. Ch. Aug. 27, 2015) (finding after trial that certain directors were liable for $148 million in damages, based on fiduciary breaches in going-private transaction); In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *43 (Del. Ch. May 3, 2004) (finding after trial that certain defendants were liable to stockholders for damages of $27.80 per share for fiduciary breaches in going-private transaction). See also In re Jefferes Grp., Inc. S’holders Litig., 2015 WL 1414350 (Del. Ch. Mar. 26, 2015) (ORDER) (approving settlement for $70 million (net of attorneys’ fees) to resolve allegations involving conflicts of interest in the sale of Jefferies Group to Leucadia National Corporation); In re Del Monte Foods Co. S’holder Litig., Cons.C.A. No. 6027-VCL, 2011 WL 6008590 (Del. Ch. Dec. 1, 2011) (ORDER) (approving $89 million settlement of stockholder suit alleging fiduciary duty violations in connection with leveraged buy-out).

18 Stockholder plaintiffs who seek expedition benefit from the most favorable standard available under our law for assessing the merits of a claim—”colorability”—and from the sensible policy of this Court to attempt to resolve disclosure claims before stockholders are asked to vote. [...]